HomeMy WebLinkAbout1991 Report on the Revenue Requirements Cost of Service and RatesSewer / Drain
Report on Requirements, Cost of Service, and
REP( Rates -
.REVENUE R� 1991
Permanent
COST OF SER
WASTEWATER UTILITY
CITY OF LANSING, MICHIGAN
1 •
`'rrr�rr.rrrrrrr'
PUBLIC SERVICE DEPARTMENT -
BLACK & VEATCH
PROGRESS BY DESIGN
1991
Contents
Executive Summary
Introduction
Scope
Summary of Findings and Recommendations
Financial Plan
Cost of Service Allocations
Wastewater Rates
Revenue
Customer Growth and Wastewater Volumes
Revenues
Revenue Requirements
Operation and Maintenance Expense
Capital Improvements
Debt Service
Summary of Revenues, Expenditures; and Obligations
Cost of Service Allocations
Cost of Service to be Allocated
Customer Classifications
Functional Cost Components and Cost Categories
Allocation of Plant Investment and Rate Base
Allocation of Depreciation' Expense
Allocation of Operation and Maintenance Expense
Distribution of Costs to Customer Classes
Units of Service
Customer Class Cost of Service.
Wastewater Rate Adjustments
Existing Rates
Proposed Rates
Service Charges
Commodity Charge
Surcharge Rates
Industrial Pretreatment Program
Adequacy of Proposed Wastewater Rates
Typical Bills
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TC-1
Contents (Continued)
Environmental Protection Agency User Charge Requirements
Miscellaneous Policies.
Allocation of City Administrative Costs
Board of Water and Light Billing and Collection
Billing Frequency
Customer Classification
Accounting System
Lawn Sprinkling and Institutional Exemptions
Page
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TC-2
Contents (Continued)
List of Tables
Page
Table 1
Summary of Projected Number of Accounts
2
Table 2
Summary of Projected Wastewater Volumes
3
Table 3
Summary of Projected Operating Revenues Under Existing
Rates
5
Table 4
Summary of Projected Operation and Maintenance Expenses
7
Table 5
Projected Five Year Capital Improvement Program Flow of
Funds,
8
Table 6
Summary of Existing and Proposed Debt Service
10
Table 7
Projected Revenues, Expenditures, and Obligations Under
Existing Rates
13
Table 8
Projected Revenues, Expenditures, and Obligations Under
Existing Rates and Proposed Rate Adjustments
16
Table 9
Projected Fund Balances Under Proposed Rate Adjustments
17
Table 10
Cost of Service to be Recovered from Rates
19
Table 11
Allocation of Net Plant Investment to Cost Categories
22
Table 12
Allocation of Net Depreciation Expense to Cost Categories
24
.Table 13
Allocation of Operation and Maintenance Expense to Cost
Categories
25
Table 14
Estimated Units of Service
27
Table 15
Unit Costs of Service
29.
Table 16
Cost of Service Allocated to Customer Class
30
Table 17
Comparison of Allocated Cost of. Service with Revenue
Under Existing Rates
31
TC-3
Contents (Continued)
List of Tables (Continued)
Table 18 Schedule of Existing Rates and Charges
Table 19 Schedule of Proposed Rates and Charges
Table 20 Comparison of Allocated Cost of Service with Revenue
Under Existing Rates and Proposed Rates
Table 21 Typical Customer Monthly Wastewater Bills Under Existing
and Proposed Rates
Page
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TC-4
Executive Summary `
Introduction
This report was prepared for the City of Lansing Department of Public Services to
evaluate the financing planning and rate development activities of the City's Wastewater
Utility. The specific goals of the study were to:
• Review and evaluate existing policies and procedures affecting waste-
water rates;
• Evaluate the adequacy of projected revenues under existing rates to
meet projected revenue requirements;
• Develop a sound financial plan for the wastewater utility covering both
ongoing operations and planned capital improvements;
• Allocate the Wastewater Utility's projected 1992 revenue requirements
to the various customer classes in accordance with the respective
service requirements;
• Develop a suitable schedule of wastewater rates which will produce
revenues adequate to meet financial needs on a basis which recognizes
customer costs of service, local policy considerations, and requirements
of the Environmental Protection Agency for user charges;
• Develop a computer financial planning and rate model which will
enable the Wastewater Utility to revise and update Wastewater Utility
revenue requirements, cost of service allocations, and rates on a routine
basis.
Scope
This report presents the results of a comprehensive study of the projected revenues,
revenue requirements, costs of service, and proposed rates for wastewater .service. For
purposes of this report, the study period has been defined as the six fiscal years beginning
July 1, 1990 and ending June 30, 1996. In this report references to years are for the 12
month period ending June 30 unless otherwise noted. Fiscal year 1991 revenues and revenue
requirements were estimated based on a review of interim Wastewater Utility financial and
budget information, while revenues and revenue requirements were projected for the
remaining five years of the study period. The study of revenue requirements recognizes
projected operation and maintenance expense, establishment of reserve funds, requirements
of the Environmental Protection Agency, and capital financing requirements. Capital
financing requirements include payments on outstanding and planned revenue and general 4
t
obligation bond issues as well as capital improvement expenditures met from annual revenues
and available reserve funds.
- The Wastewater Utility costs of service were developed by class of customer and type
of service based on consideration of the revenue needs and projected customer service
requirements for the Utility. Proposed rates were designed for the Utility in accordance with
allocated cost of service and local policy considerations. As part of the study, a compre-
hensive computer financial planning and rate model was developed which will enable the
Utility to revise and update Wastewater Utility revenue requirements, cost allocations, and
rates on a routine basis.
Summary of Findings and Recommendations
The principal findings and recommendations of the study are summarized herein.
Financial Plan
• As shown on Exhibit 1, revenues under the existing rate schedules are
not projected to be sufficient to meet projected revenue requirements.
Annual deficits are projected to range from $562,100 in 1992 to
$4,790,900 in 1996. It is projected that it will be necessary to increase
revenues by a total of over 34 percent by the end of the study period.
Exhibit 1
Comparison of Projected Revenues and Revenue Requirements
S20
S18
H S16
c
0
S14
S12
$10
1991 1992 1993 1994 1995 1996
Revenues Under ® Revenues Under ® Revenue
Existing Rates Proposed Adjustments Requirements
• It is projected that annual revenue adjustments of 9 percent in 1992,
4.5 percent in both 1993 and 1994, 7 percent in 1995, and 5 percent
in 1996, coupled with revenue bond issues of $3,000,000 in 1992 and
$5,000,000 annually beginning in 1993, will allow the Wastewater
Utility to meet projected operating and capital expenditures as well as
maintain adequate reserve balances.
• It is recommended that the Wastewater Utility establish and maintain
funds similar in character to the funds identified in. the accompanying
report as the Capital Contingency Fund and the Improvement Fund.
• It is recommended that the Utility maintain a cumulative operating
reserve balance of approximately 45 days of projected operation and
maintenance expense.
Cost of Service Allocations
•. In analyzing the Wastewater Utility's cost of service for allocation to
customer classes,. the annual revenue requirements for fiscal year 1992
are selected -as the test year requirements to develop proposed waste-
water rates.
• Exhibit 2 presents a comparison of the allocated cost of service with
the revenue under existing rates for each customer class. The percent
recovery of cost of service is indicated on the exhibit.
Exhibit 2
Comparison of Allocated Cost of Service
With Revenue Under Existing Rates
87.9%
so $4 $b ss
trrn�«u .
IN
,Uk...a c. oc s.14- ® P.. ud. ausins R__ �.. .
iii
Wastewater Rates ,
• A comparison of existing and proposed wastewater rates is presented
in Exhibit 3. Monthly wastewater bills under existing and proposed
rates for several typical customers are compared in Exhibit 4.
Exhibit 3
Comparison of Existing and Proposed Rates and Charges
Analysis
Type of Charge
Type of Charge
Existing Rates
Proposed Razes
Retail service Charge = S/mth
. $1.14
$3.21=
---------------
westsiae water sic Chg - S/gtr
----------
$3.42
-----------
$9.63
----------------
Commodity Charge - S/Ccf
----------
$1.76
-----------
� $1.75
----------------
BOD Surcharge - S/lb
----------
$0.09
-----------
$0.21
-----------
----------------
SS Surcharge - S/lb
----------
$0.0$
$0.09
NM Surcharge - S,/lb
N/A
$0.21
----------------
1PP Feed Fee - $/��
----------
N/A
-----------
$4.71
- - - - -
- - - - - - - - - - - - - - - -
IPP Composite Supple - S/sunple
- - - - - - - - - -
$226.00
- - - - - -
$226.00
-----------------------------------------
IPP Grab Sample b Sample - S/sample
$9
$90.00
>Pp
Exhibit 4
Comparison of Typical Monthly Bills
Under Existing and.Proposed Rates
Customer
Water Use
Ccffmonth
Bill Under �
Existing Rates
Bill Under
Proposed Rates
Increase/
(Decrease)
Residential
4.0
$8.18
$1021
$2.03
--------
--------
Resideatial
-----
'7.5
-------
$14.34
-------
51634
$2.00
Resideatial
--------
15
S27S4
$29.46
-------
$1.92
--------
Commerzaal
-----
15
-------
5I7S4
53421
-------
$6.63
--------
--------
Comrrtezdal
-----
50
----14--
$89.-
595.4b
56.28
--------
--------
Cornrrterdal
-----
100
-------
$177.14
- - - - - - -
5182.96
55.78
---$4-.78----
--------
Indusaial
-----
200
---5353--.14--
----5357-.-96 -
--------
--------
Industr-.t ial
-----
2,000
-------
$3,521.14
-------
$3,507.96_
_ S$13_22) _ _
--------
Industrial
-----
5,00_0
---------
$8,80_1.14_
- - - - - -
$8.757.9_6_
_ ($43.2_2) - -
_
W_ estside Water
_
-_ - -58.18 -
- - $1021
- - - - - -
52.03-
--------
Weataide water
_ _ _4._0-_
- - 7.5
- - - - - ---
$14.34
-
$16.34
-------
52.00
--------
wcusideweer
15
_ ------
S27S4
$29.46
51.92
iv
f
• The proposed rates have been designed to generate an overall 9 percent
increase in test year 1992 revenues from revenue levels generated by
existing rates. The regulations pertaining to acceptance of Federal
EPA. grants require the establishment of user charges to be levied on
users of the wastewater treatment works which recover the user's
proportionate share of the costs of treatment works operation and main-
tenance expense, including replacements. The proposed rates satisfy
this requirement.
• It is recommended that the Wastewater Utility maintain the existing
surcharge rate structure for industrial customers and add surcharge
rates for ammonia nitrification.
• It is recommended that an Industrial Pretreatment Program fixed annual
fee be established to help finance the program This charge. should be
levied on the bills of all customers in the Commercial and Industrial
customer classes.
• The method in which the City of Lansing allocates administrative
charges to the Wastewater Utility and other divisions has been
reviewed and found to be reasonable. It is recommended that the
Wastewater Utility maintain its current procedure in establishing billing
charges with two adjustments:
1: The budgeted collection fee amount should be established con-
sistent with the estimate base cost used for establishing the
billing charge.
2. Service charges should be adjusted to include recovery of a
portion of costs allocated to infiltration and inflow.
• It is recommended that 754 percent of the responsibility for infiltration/
inflow volumes be allocated to customer classes based on the number
of customers in each class. The remaining 25 percent should be
allocated based on water sales volumes. It is also recommended that
this allocation be phased in over a period of three years to avoid a
sudden substantial increase in residential wastewater bills.
• The Board of Water and Light's policy for determining billing and
collection fees to charge the Wastewater Utility has also been reviewed
and is reasonable. A review of billing costs for other wastewater
utilities in Michigan shows that the Utility's billing fees and annual
charges are in line with those experienced by other utilities.
i
v
• It is recommended that the Wastewater Utility maintain current policies
regarding customer classification and seasonal use exemptions.
• In order to more accurately assign responsibility for wastewater
treatment plant and collection system costs, it is recommended that the
Wastewater Utility establish an accounting system based on a uniform
chart of accounts for wastewater utilities as established by the National
Association of Utility Regulatory Commissioners.
vi
Revenue
The principal revenues for the Wastewater Utility are derived from charges for
wastewater service provided to the customers of the Utility. Income is also generated through
a variety of other miscellaneous revenue sources.
Customer Growth and Wastewater Volumes
The customers of the Wastewater Utility consist of retail customers located both
within and outside the City. The Utility's customer classifications as incorporated in the
current wastewater rate schedule are:
Residential - primary use of property is residential.
Commercial - primary use of property is for commercial, institutional, and
miscellaneous purposes.
Industrial - primary use of property is for industrial purposes.
Westside Water District - municipality located outside the City limits who
discharges wastewater to the Lansing collection system through individual
customer connections.
Customers of the Westside Water District are billed quarterly. All other customers_
receive bills on a monthly basis. The number of Wastewater Utility customers estimated for
1991 and projected for 1992 through 1996 is shown in Table 1. Based on review of available
historical data and discussions with Utility staff, a modest decline in the.number of residential
customers is projected for the study period while a small increase in commercial customers
is anticipated. No customer growth is projected for other customer classes.
Projected wastewater volumes through 1996 are shown in Table 2. Generally, metered
water sales to retail wastewater customers are used to estimate wastewater volumes, recog-
nizing a 10 percent discount for residential customers in summer months to account for lawn
sprinkling. Projected wastewater volumes are based on projected number of customers and
historical patterns of water usage per customer recognizing the effects of abnormal weather
conditions on customer water usage. Projected retail wastewater volumes reflecting normal
weather conditions are shown. Wastewater volumes for industrial customers are adjusted to
reflect recently experienced reductions in volumes due to the development and implementa-
tion of pretreatment programs.
The Wastewater Utility has contracted to provide treatment of wastewater from the
Westside Water District. Wastewater volumes from. the District are estimated based on
metered water sales to the District's retail customers and are not anticipated to change
through the study period. -
n
1
Table 1
Summary of Projected Number of Accounts
Fiscal Year Ending June 30
Line'
Estimated
Proiected
1994
1995
1996
No.
Customer Class
1991 1992 1993
1
Residential
37,054 37,004 36,954
36,904
36,854
36,804
2
Commercial.
4,442 4,454 4,466
4,478
4,490
4,502
3
Industrial
63 63 63.
63
63-
63
4
Westside Water District
2,017 2,017 2,017
2,
�017
2,017
2,017
5
Total
43,576 43,538 43.500
43.462
43,424
43.386
2
Table 2
Summary of Projected Wastewater Volumes
Fiscal Year Ending June 30
Line
Estimated
Projected
No.
Class
1991
1992
1993
1994
1995
1996
_Customer
(Cco
(Ccf)
(Ccf)
(Ccf)
(Ccf)
(Ccf)
1
Residential
3,089,800
3,085,600
3,081,500
3,077,300
3,073,100
3,069,000
2
Commercial
3,029,700
3,037,900
3,046,100
-3,054,300
3,062,500
3,070,700
3
Industrial
1,362,100•
1,362,100
1,362,100
1,362,100
1,362,100
1,362,100
4
Westside Water District
210,900
210,900
210,900
210,900
210,9W
210,900
5
Subtotal h , 1 a b If-
--- ---------
7,692,500
----------
7,696,500
-----------
7,700,600
--____---
7,704,600
----- -
7,708,600
------------
7,712,700
6
Infiltration/Inflow
4,142.100
4,144,3W
4,146,500
4,148,600
4,150,800
4,153,000
7
Total
11,834,600
11,940,800
11,847,100
11853 00
11,859,400
11,865,700
,•
3
Wastewater collected and treated by the Utility includes sanitary wastewater flow and
infiltrationfnflow of ground water and storm. runoff. Based on an analysis of tilstoncai
treatment plant data, it is estimated that infiltration/inflow quantities reaching the wastewater
treatment plant are approximately 35 percent of total influent at -the plant. Infiltration/inflow
quantities for 1991 through 1996 are estimated and projected on this basis and are shown on
Line 6 in Table 2.
As indicated on Line 7 in Table 2, total contributed wastewater volumes are projected
to remain at approximately 11,850,000 cubic feet throughout the study period.
Revenues
The operating revenues of the Wastewater Utility included billing charges, wastewater
volume charges, surcharges to industries discharging wastewater having high pollutant
strengths, and sampling and analysis charges to industries for Industrial Pretreatment Program
(IPP) compliance. The projected operating revenues for the study period that would be
achieved under the Wastewater Utility's existing rate schedule staff shown in Table 3. The
revenues shown for the customer classes on Lines 1 through 4 of Table 3 include wastewater
volume charges and billing charges. Billing charge revenues are developed by application
of existing service charges to the projected number of customers. Wastewater revenues are
projected by applying volume charges to projected wastewater billing units. Revenues from
IPP charges are projected on Line 5. As has been the case in recent years, surcharges to
industries are not projected to generate any revenue during the study period.
All revenue projections have been made based on the rates currently in place and
assuming a one -month lag from the time a bill is issued to the time the revenue is received.
Because of this billing lag, the projected revenues for 1991 consist of one month at 1990
rates and eleven months at 1991 rates.
Revenue Requirements
The revenue required to adequately provide for the continued operation of the
Wastewater Utility must be sufficient to meet the annual cash obligations, or revenue
requirements. Revenue requirements include: (1) system operation and maintenance expense;
(2) establishment and maintenance of operating and capital contingency reserve funds; (3)
expenditures for equipment and improvements not financed from bond proceeds; and (4) debt
service requirements on bonds issued to finance capital improvements.
Operation and Maintenance Expense
The annual operation and maintenance expenses of the Utility include costs related
to payroll, chemicals, power, natural gas, and other items. Projected 1991 through 1996
4
Table 3
Summary
of Projected Operating Revenues
Under Existing Rates
-
Fiscal Year Ending June 30
Line
Estimated
1993
Projected
1994
1995
1996
No.
Customer Class
_
1991 1992
S
S
S
S S
1
Residential
5.867,3W 5,936,900 5,928,900
5,920,800
5,912,900
5,904,900
2
Commercial
5,321.800 5,407,600 5,422,200
5,436,900
5,451,400
5,466,000
2,366,500 2,398200 2,398,200
2,398,200
2,398,200
•2;398,200
3
Industrial
4
Westside Water District •
366,300 371,200 371,200
371,200
371,200
371,200
5
Industrial Pretreatment Program
. 62,700 63,400 63,400
63,400
63,400
63,400
6
Industrial Surcharges
13,984,600 14,177,300 14,183,900
14,114,190 500
14197 00
14 03 700
7
Total
s
5
operation and maintenance expenses for the Utility are shown in Table 4. The 1991 expen-
diture levels are projected based on an' analysis of the 1991 budget and actual costs during'
the first six months of the fiscal year. A review of historical data indicates that annual
operation and maintenance expenses, have averaged approximately 85 to 90 percent of
budgeted levels. As such, operation and maintenance expenditures projected for 1992 are less
than budgeted levels. The 1992 projection was obtained by applying a "budget adjustment
factor" of 95 percent to the expenditure levels identified in the budget.
Projections for the period 1993 through 1996 are based on projected 1992 levels
adjusted to reflect increased costs due to inflation and additional wastewater volumes treated
at the wastewater plant. Payroll costs, including benefits, are projected to increase 5 percent
per year after 1992. Based on, conversations with representatives of the Lansing Board of
Water and Light, power costs are projected to remain constant through 1993 and increase five
percent annually thereafter. All other operation and maintenance costs, including chemicals,
are projected to increase at a general inflation rate also estimated at 5 percent per year.
As shown on Line 7 of Table 4,' total operation and maintenance expenses for the
Wastewater Utility are projected to increase from $8,894,200 in 1991 to $11,033,900 in 1996.
Capital Improvements
The Wastewater Utility's capital improvement program for the study period is.
presented in the upper portion of Table 5. The capital financing requirements are separated
into two categories. Lines 1 through 3 summarize projects that are expected to be funded
from revenues. These include normal annual replacements and extensions and a $1,500,000
allowance beginning in 1993 for major capital improvements. Included for this -item in fiscal
year 1992 is $500,000 for design of combined sewer overflow (CSO) improvements. Lines 4
through 6 summarize capital improvement projects that have been designated for financing
through issuance .of revenue bonds.- The major portion of the capital improvement program
will be projects related to the management -and eventual elimination of combined sewage
overflows.
The elimination of combined sewage overflows is a major goal of the EPA and the
Michigan Department of Natural Resources. The City of Lansing is addressing the CSO issue
by planning to separate the remaining portions of the combined system. It has been estimated
that separating the system will cost approximately $175,000,000 over the next 30 years. The
capital financing plan summarized in Table 5 provides annual funding of $4,750 W for these
CSO improvements beginning in 1993 as shown on Line 4.
Annual capital improvement expenditures for the period are projected to vary from
an estimated $3,572,400 in 1992 to $7,240,500 in 1996 and are presented on Line 7.
29
Table 4
Summary of Projected Operation and Maintenance Expenses
Fiscal Year Ending June 30
Line
Estimated
Proiected
No.
Category
1991
1992
1993
1994
1995
1996
S
S
S
S
S
S
1
Personal Services
4,082,500
4,614,400
4,945,100
5,087,400
5,341,700
5,608,800
2
Collection Fees
570,400
630,400
661,900
695,000
729,800
766,300
3
Administrative Charges
509,800
484,400
508,600
534,100
560,800
588,800
4
Utilities
1,3.16,400
1,372,200
1,392,300
1,461,900
1,535,000
1,611,700
5
Chemicals
291
271,900
285,500
299,800
314,800
330,500
6
Other
2,123,900
1,750,600
1,838,300
1,930,000
2.026,700
2,127,800
7
Total
------ ;-- ---
8,894 200
------------
9,123,900
-----
9,531,700
-------�-_
10,0082
10,508,800
11,033,900
4
7
Table 5
Projected Five Year Capital
Improvement Program Flow Of Funds
Line Fiscal Year Ending June 30
10. Description 1991 1992 1993 1994 1995 1996
S $ S S S
Capital Improvement Program
Revenue Funded Projects
1 Normal Annual Replacements and Extensions
2 Major Capital Improvements
3 Total Revenue Funded Projects
Projects EIigible for Debt Financing
4 Combined Sewer Overflow Projects
5 Other Major Capital Improvements
6 Total Debt Financed Projects
7 Total Capital Improvement Program
Capital Improvement Program Financing
Beginning Balance - Improvement Fund
9 Budgeted Revenue Funded Improvements
Bond Proceeds
10 Bond Sale
11 less: Bond Reserve Account Deposit
12 less: Issuance Expense & Discount
13 Net Bond Sale Proceeds
14 Investment Earnings (1)
15 Available Capital Improvement Program Financing
16 Ending Improvement Fund Balance
(1) Calculated at 795' interest rate.
.00 814,9W
855,600
898,400
943,3W
990 eft
- 4,750,000 4,750,000 4,750,000 4,750,000
2,257,500 - - - -
2,257,500 4,750,000 4,750;000 4,750,000 4,750,000
777,600 3,572,400 7,105,600 7,148,400 7 93 7240,500
65,100 . 69,800 589,200 465,800 333,500 191,600
777,600 1,314,900 2,355,600 2,398,400 2,443,300 2,490,500
- 3,000,000
5,000,000
5,000,000
5,000,000
5,000,000
- (294,300)
(490,500)
(490,500)
(490,500)
(490,500)
- (45,000)
(75,000)
(75,000)
(75,000)
(75,000)
- 2,660,700
4,434,500
4,434,500
4,434,500
4,434,500
4,700
116,200
192,100
183,200
173,600
163,300
847,400
4,161,600
7,571,400
7,481,900
7,394,900
9,900
7279,900
69,800
589200
465,800
333,500
191,600
39AM
0
Financing requirements for the capital improvement program are anticipated to be met
from a combination of funds on hand, Wastewater Utility revenues, and bond financing, as
shown in the lower portion of Table 5. The capital improvement program is projected to be
financed from an estimated 1991 beginning balance in the Improvement Fund of $65,100
shown on Line 8; transfers of annual revenues from the Operating Fund shown on Line 9;
proceeds from the sale of revenue bonds as shown on Lines 10 through 13, and interest .
earnings estimated at 7 percent of the average balance in the Improvement Fund shown on
Line 14. The Utility is planning to sell $3,000,000 in revenue bonds in July 1991 to finance
major capital improvements. Starting in 1993, it is anticipated that revenue bonds will' be
issued in $5,000,000 increments to finance the CSO related improvements. All other major
capital improvements are expected to be revenue financed. Interest earnings on construction
funds established by bond issues,.are required by bond ordinance to stay in the Improvement
Fund and be used only for funding improvement projects.
Debt Service
Table 6 summarizes the projected debt service on existing and proposed debt. The
Wastewater Utility has two revenue bonds and one general obligation bond with -$32,550,000
in principal outstanding as of July 1, 1990 on which it pays principal and interest. The debt
service for these bonds is presented on Lines 1 through 6. Debt service on the proposed
bonds identified in Table 5 is shown on Lines 7 through 9, and is projected assuming a
20 year bond term and an interest rate of 7.5 percent.
9
Table 6
Summary Of Existing And Proposed Debt Service
Under Proposed Rate Adjustments
Line
Fiscal Year Ending June 30
No.
Description
1991
1992
1993
1994
1995
1996
S
S
S
S
$
$
Outstanding Bonds
Revenue Bonds
1
Principal
1,065,000
1,190,000
1290,000
1.380.000
1,475,000
1,575,000
2
Interest
2,303.060
2225,660
2,136,935
2.037,673 .1.928338
1.808.488
3
Total
---------- --
3,368,060
---- ---------
3,415,660
-------- ----
3,426,935
-----
3,417,673
3,403,338
3,383,488
General Obligation Bonds
_
4
Principal
500,000
500,000
500,000
-
-
-
5
Interest
86,000
57,000
27,500
-
6
Total
586,000
557,000
527,500
-
-
-
Proposed Bonds
7
Revenue Bonds
Principal
-
70,000
190,000
320,000
460,000
615,000
'8
Interest
-
224,300.
594,800
955,300
1,305,800
1,641,300
Total
W-~�
294,300
N794,800
1,275,300
1,765,800
2,256,300
• 10
Total Debt Service
Principal
1,565,000
1,760,000
1,980,000
1,700,000
1,935,000
2,190,000
11
Interest
2,389,060
2,506,960
2,759,235
- 2,992,973
----------_
3,234,138
3,449,788
12
Total
-------------
3,954,060
-------------
4,266,960
-------------
4,739235
4,692,973
5,169,138
5,639,788
10
Summary of Revenues, Expenditures, and Obligations
In order for the Wastewater Utility to operate effectively, it is both prudent and
appropriate to maintain operating reserves and capital contingency fund balances. Operating
reserves are needed to offset fluctuations in day-to-day operations of the Wastewater Utility
where the timing and need for revenues may not match the levels of expenditures for
operating and maintaining the Utilities. While there is no hard and fast rule for determining
an appropriate level of operating reserves, one method of estimating an appropriate level used
by some utility regulatory commissions is to set operating reserves equal to' 15 days of annual
purchased power expense plus 45 days expense of all other operating expenses. Another
method is to set operating, reserves at some specified number of days of total operating
expenses, including purchased power. Typically, anywhere from 30 to 90 days operating
reserve are recommended when using this approach. ' For purposes of this report, 45 days has
been used as the targeted operating reserve requirement.
Capital contingency reserve funds are needed to provide emergency funds to finance
repairs and replacements due to major equipment failures, such as large pumps -or treatment
plant components. Such reserves help the Utility to finance such unanticipated repair or
replacement costs and enable the Utility to schedule long term financing. Again, there is no g
hard and fast rule for determining an appropriate level of capital contingency reserves. One
rule of thumb sometimes used is to set capital contingency reserve levels somewhere in the
range of 0.5 to 2.0 percent of system investment. Another potential method is to set the
capital contingency reserve level at approximately 15 percent of operating expenses. To
avoid dramatic fluctuations in revenues required to establish the Capital Contingency Fund
in the cash flow analysis discussed herein, the annual deposit to the fund has been set at 3
percent of projected operation and maintenance expense until such time that the fund'
accumulates 15 percent of operating expenses. Once this desired level is reached, interest
earnings from investment of the fund should be made available for system operations. When
expenditures are made from this fund, they should be replaced as soon as feasible to restore
the fund to � the desired level.
The Improvement Fund for the Wastewater Utility is simply a holding account"
serving as depository for capital improvement funding. As such there are no recommended
levels for this fund other than to have adequate balances to meet financing requirements.
At the, end of 1990 the Wastewater Utility had cash and investment available for
system operations and capital improvements totaling approximately $436,700. For purposes
of this report approximately $371,600 of this total is established as the 1991 beginning
balance in an operating reserve available for system operations. The remaining $65,100 is
set aside as the 1991 beginning balance of an Improvement Fund to finance the capital
improvement program. No beginning balance has been assumed for the Capital Contingency
Fund.
Presented in Table 7 is a projected six year -cash flow of revenues, expenditures and
obligations of the Wastewater Utility under existing rates. Summarized in this table are the
annual revenues and revenue requirements showing end of year annual and cumulative
balances and/or deficits of funds available for subsequent years' operations and indicated .
required increases in operating revenues.
Shown on Line 1 of Table 7 is projected Revenues for Wastewater Service from
Table 3, representing billing charge, volume charge, and IPP revenues at current rate levels
which are subject to rate adjustment. Sources of projected Other Operating Revenue are
assumed not to be subject to rate adjustment, and are shown on Line 2. For 1991, this figure
includes a one-time increase in cash of approximately $408,500 arising from the conversion
from quarterly to monthly billing in November, 1990. Projected Interest Income from
investments of balances in the Operating Fund and other funds excluding the Improvement
Fund is shown on Lines 3 and 4. -Total Revenue under the Wastewater. Utility's current rate
levels is shown on Line 5, of Table 7, and is projected to range from $14,717,400 in 1992 to
$15,018,800 in 1996.
Projected Operation and Maintenance Expense from Table 4 is summarized on Line
6 of Table 7. Annual deposits to establish the Capital Contingency Fund are presented on
Line 7. For 1991, this amount is estimated to be $200,000.. As discussed earlier, starting in
1992 these amounts represent 3 percent of projected operation and maintenance expense until
such time that the fund balance accumulates 15 percent of projected operation and
maintenance expense. Annual deposits would be required thereafter in amounts necessary to
maintain the fund balance at 15 percent of projected operation and maintenance expense. On
Line 8 a transfer to the City's General Fund to amortize the City's contributed equity in the ,
wastewater utility is presented. Line 9, presents annual contributions to operating reserves
necessary to maintain year end reserve balances at' 45 days of projected operation and
maintenance . expense.
Projected annual- debt service requirements presented previously in Table 6 are
summarized on Lines 10 through 13. Line 14 presents the budgeted revenue funded
improvements from Table 5. As shown on Line 15, total revenue requirements are projected
to increase from $13,825,900 in 1991 to $19,809,700 in 1996. Subtracting total revenue
requirements from total revenues (Line 5 - Line 15) indicates projected annual operating fund
balances or deficits, which are shown on Line 16. For 1992, this line shows a projected
annual deficit of $562,100.
12
l
Table 7
Projected Revenues, Expenditures, And Obligations
Under Existing Rates
Line
No. Description
Revenue
Operating Revenue
1 Revenue from Wastewater Service
2 Other (1)
Non -Operating Revenue - Interest Income
3 Operating Fund
4. Other Funds (Excl. Improvement Fund)
5 Total Revenue
,
Revenue Requirements
6 Operation and Maintenance Expense
7 Contribution to Capital Contingency Fund
8 General Fund Return on Equity
9 Contribution to Operating Reserves
Debt Service
10 Existing Revenue Bonds.
11 Existing General Obligation Bonds
12 Proposed Bonds
13 Total Debt Service
14 Budgeted Revenue Funded Capital Improvements
15 Total Revenue Requirements
16 Ending Balance (Deficit) Available
17 Revenue from Prior Indicated Adjustments
18 Use of Reserves to Meet Revenue Requirements
19 Additional Revenue Required from Adjustments
20 Approximate Increase Req'd in Revenues (2)
1 Cumulative Revenue Increase Required
22' Debt Service Coverage Under Req'd Revenues (3)
23 Beginning Balance
24 Net Operations
25 Contribution to Operating Reserves
26 Use of Reserves to Meet Revenue Requirements
27 Cumulative Operating Reserve Balance (4)
Fiscal Year Ending June 30
1991 1992 1993 1994 1995 1996
$ $ $ $ $ $
13,984.600 14,177,3W 14,183,900 14,190.500 14,197,100 14.203,700
488,500 80,000 80,000 - 90,000 80,000 80,000
60,000
89,000
81,600
85,500
89,800
94,200
324,500
371,100
437,600
504,800
573,000
.640,900
---------------- -------
14,857,600 14,717,400 14,783,100
------------
14,860,800
14,939,900 15,018,800
8,894200
9,123,900
9,531,700
10,008200
10,508AW 11.033,900
200,000
273,700
286,000
300200
315,300
279,900
-
300,000
300,000
300,000
300,000
300,000
_
-
51,000
59,500
62,600
65,600
3,368,100
3,415,700
3,426,900
3,417,700
31403,3w
3,383,500
586,000
557,000
294,3W
527,500
784,800
-
1,275,300
-
1,765,800
_
2,256,300 ,
-
3,954,100
4,267,000
4,739,200
4,693,000
, 5,169,100
5,639,800
777,600 1,314,90.0
2,355,600 2,398,400 2,44373W 2,490,500
13 825 900 15,279,500
1717 2�500 17,759,300 18,799,100 19,809,700.
1,031,700 (562,100)
(2,480,400) (2,898,500) (3,859.200) (4,790,900)
326,700 2,677,400 2,920,000 3,946,400
- 262,800
_ 299,3W
- - -
2,153,700 221,100 939,200 844,500
2.30%
16.19% 1.43% 5.99% 5.08%
- 230%
18.87% 20.57% 27.78% 34.27%
151% + 138%
163% 165% 160% 156%
371,600 1,403,300 1,140,500 " 1,191,500 1,251,000 1,313,600
1,031,700 - - _
51,000 59,500 62,600 65,600
(262,800)
1,403,300 1,140,500 1,191,500 1151,000 1,313,600 1379200
c
(1) FY 1991 figure includes one-time cash flowincrease associated with conversion to monthly billing.
(2). Calculated on 11 months of base revenue to reflect the I month billinglag.
(3) (Line S + Line 17 + Line 19 - Line 6)/Line 13
(4) Target level for Operating R eserve. Balance is 4S days of proi'ted Operation and Maintenance expense-
Shown on Line 17 are increased revenues resulting from prior years' estimated
revenue increases. Thus, increased revenues shown in 1993 of $326,700 are 2.30 percent of
Line 1 and result from the required 1992 revenue increase as indicated on Line 20.
On Line 18, the amounts of operating reserves used to meet annual deficits are
presented. The amounts are limited by beginning operating reserve balances and the
requirement that the cumulative year end operating reserve balance be equal to at least .45
days of projected operation and maintenance. expense. Projected annual deficits that are not
met from revenues from prior adjustments or operating reserves must be met from current
revenues and appear on Line ,19. As shown on Line 20 increases in operating revenues are
projected to be necessary to meet the Wastewater Utility's revenue requirements during the
study period. The indicated annual increases in operating revenues range from 16.19 percent
1993 to 1.43 percent in 1994. These percentages are calculated by dividing the additional
revenue required (Line 19) by eleven -twelfths of'the base revenue on Line'1 to reflect the one
month billing lag. The calculation of revenue requirements and required .revenue increases
in subsequent years assumes that the increases indicated on Line 20 will be implemented.. y
Line 21 presents the required cumulative increase and indicates that revenues must increase
by about 34 percent over current levels in order to meet projected revenue requirements
during the study period.
Although the City's revenue bond ordinance authorizing the issuance of the
Wastewater Utility's currently outstanding revenue bonds contains no requirement regarding
net revenues and the annual amount required for the payment of principal and interest on
outstanding bonds, such coverage is displayed on Line 22. The ordinance does require that,
in order to issue additional bonds, net revenues reflecting proposed rates must be at least
equal to 130 percent of the average annual principal and interest payments on existing and
proposed bonds. This requirement is projected to be met as demonstrated on Line 22 of
Table 7.
The beginning operating reserve balance for 1991 is assumed to be approximately
$371,600 as shown on Line 23 and is comprised of the Wastewater Utility's current assets
less inventories as of June 30, 1990, -of $2,470,879 less accounts payable and amounts due
to other funds as of June 30, 1990, of $2,099,283. -The net effect of annual operations on
reserve levels is shown on Line 24. Revenue requirements arising from reserve balance
requirements must stay in the Operating Fund and are shown on Line 25.
The use of Reserves to meet Revenue Requirements is addressed on Line 26 and
represents amounts from Line 18. The Cumulative Operating Reserve Balance (Line 27)
achieves the targeted level of 45 days of projected operation and maintenance expense in
1992 and maintains this level throughout the study period.
14
In Table 8 a revenue adjustment strategy is proposed to address the deficiencies
identified in Table 7. The format of this table is basically the same as Table 7 except that
Line 2 allows for planned revenue adjustments to be included to increase projected revenues.
Presented in Table 8 are projected revenues, expenditures and obligations under proposed
wastewater revenue increases of 9 percent for 1992, 4.5 percent for 1993 and 1994, 7 percent
for 1995, and 5 percent for 1996. Increases in wastewater service revenue under each of the
proposed adjustments are shown on Line 2. The_figures on Line 2 for the first year of each
adjustment 'represent application of the adjustment to eleven -twelfths of the revenue presented
on Line 1 to reflect the one month billing lag.
Other income and expense categories shown in Table 8 are as shown in Table 7,
except for interest income and the net effect on annual operating reserve requirements.
Increasing revenues by 9 percent in 1992 will provide an increase in operating reserves which
may then be used to meet revenue requirements in -1993 and 1994. The result is a more
stabilized schedule of revenue adjustments than those indicated in Table 7. Debt service
coverage requirements for additional bonds are projected to be met in all applicable years as
shown on Line 20 of Table 8.
It should be recognized that the indicated percentage revenue increases discussed
above are overall revenue increases. Based on the results of the cost of service analyses to
be presented subsequently in this report, cost of service based rate increases can be expected
to vary from this average for the various customer classes with some classes receiving an
increase of greater than average magnitude while others receive a less than average increase
or perhaps a decrease.
Presented in Table 9 are summaries of the projected reserve balances and cash flows
in the Operating Fund, Improvement Fund, and Capital Contingency Fund reflecting revenues
and transfers under the proposed annual revenue increases. The cash and investments
available for System operations and capital improvements are projected to increase from
$1,673,100 at the end of 1991 to $3,073,700 at the end of 1996 as shown on Line 13 of
Table 9.
I
15
Table 8
Projected Revenues, Expenditures, And Obligations
Under Proposed Rate'Adjustments
Line Fiscal Year Ending June 30
No. Description 1991 1992 1993 1994 1995 1996
S S S S S $
Revenue
Operating Revenue
1 Revenue from Wastewater Service 13,984,600 14,177,300 14,183,900 14,190,500 14,197,100 14,203,700
2 Revenue From Scheduled Adjustments 1
1992 Revenue Adjustment 9.0% 1,169,600 1,276,600 1,277,100 1,277,700 1,278,300
1993 Revenue Adjustment 4.5%v 637,700 696,000 696,400. 696,700
1994 Revenue Adjustment 4.5% 666,700 727,700 728,000
1995 Revenue Adjustment 7.0% 1,Q90,500 1,190,200
Qzn 9"
3 Total Revenue from Adjustments
4 Total Wastewater Service Revenue
5 Other '(2)
Non -Operating Revenue - Interest Income
6 Operating Fund
7 Other Funds (Excl. Improvement Fund)
8 Total Revenue
Revenue Requirements
9 Operation and Maintenance Expense
10 Contribution to Capital Contingency Fund
11 General Fund Return on Equity
Debt Service
12 - Existing Revenue Bonds
13 Existing General Obligation Bonds
14 Proposed Bonds
15 Total Debt Service
16 Budgeted Revenue Funded Capital Improvements
17 Total Revenue Requirements
18 Ending Balance (Deficit) Available
19 Use of Reserves to Meet Revenue Requirements
20 Debt Service Coverage (3)
1,169,600 1,914,300 2,639,800 3,792,1W 11/
/1 80,000 80,000 90,000 81 111 80,000
60,000 116,400 121,800 99,500 94,200 96,500
324,500 371,100 437,600 504,800 573,000 640,900
14,857,600 15,914,400 16,737,600 17,514,600 18,736,600 19,745,100
8,894,200 911 9,531,700 10,008,200 10,5W,8W11,033,9W
200,000 273,700 8. 111 300,200 315,3W 279,900
300,000 300,000 300,000 300,000 300,000
3,368,100 3,415,700 3,426,900 3,417,700 3,403,3W 3,383,500
586,000 557,000 527,500 - -
- .294,3W 794,800 1,275,300 1,765,800 2?56,3W
3,954,100 4,267,000 4,739,200 4,693,000 5,169,100 5,639,800
777,600 1,314,9W 2355,600 2,398,400 2,443,300 2,490,5W
13,825,900 15� 1721200 17,699,8W 18,736,500 19.744.100
.1,031,700 634,9W (474,900) (185,200)
- - 474,900 185,200
151% 159% 152% 160%
100 1,000
159% 154%
1 Beginning Balance 371,600 1,403,300 2,038,200 1,563,300 1,378,100 1,378,200
22 Net Operations 1,031,700 634,900 - - -100 1,000
23 Use of Reserves to Meet Revenue Requirements - - (474,900) (185,200)
�4 Cumulative Operating Reserve Balance (4) 1403 2,038,200 1,563� 1,378,1 78.100 1,378,200 1,379,200
(1) The Fustyear of each adjustment affects 11 months of revenue to reflect the I month billing lag.
(2) FY 1991 figure includes one -tune cash flow increase associated with conversion to monthly billing.
(3) (Line 8 - Line 9)4 nc 15
(4) Target level for Operating Reserve Balance is 45 days of profited Operation and Maintenance expense.
Table 9
Projected Fund Balances
Under Proposed Revenue Adjustments
Line
Fiscal Year Ending June 30
No.
Description
1991
1992
1993
1994
1995
1996
S
$
S
S
$
S.
Cash Flow Operating Reserve
1
Beginning Balance
371,600
1,403,300
2,038,200
1,563,300
1,378,100
1,378,200
Net Operations
1,031,700
634,900
(474,900)
(185,200)
100
1.000
3
Ending Balance
-------------
1,403,300 .
-------
2 038
--------- ---
1,563,300
---------
1,378,100
1,378200
1,379?00
Capital Improvement Fund
4
Beginning Balance
65,100
69,800
589,200
465,800
333,500
191,600
Deposits
Net Transfers
777,600
1,314,900
2,355,600
2,398,400
2,443,3W
2.490.500
6
Bond Proceeds
-
2,660,700
4,434,500
4,434,500
4,434,500
4,434.500
7
Investment Earnings
4,700
116,200
192,100
183,200
173,600
163,300
8
Withdrawals
Capital Expenditures
(777,600)
(3,572,400)
(7,105,600)
(7,148,400)
(7,193,300)
(7,240,500)
9
Ending Balance
69,800
589200
465,800
333,500
191,600
39,400
Capital Contingency Fund
_ %!
10
Beginning Balance
-
200,000
473,700
759,700
1,059,900
1,375,200
11
Reserve Requirements
200,000
273,700
286,000
300,200
315,300
279.900
12
Ending Balance
200,000
_ 473,700
r759,700
1059,900
1375 00
1,655,100
13
Total Ending Balance
1.673,100
3,101,100
2,798,800
2,771,500
2,945,000
3�073,700
17
Cost of Service Allocations
Cost of Service to be Allocated
The revenue requirements to be derived from rates and charges for wastewater service
are synonymous with the definition of the cost of service. In analyzing the Wastewater
Utility's cost of service for allocation to customer classes, the annual revenue requirements
for 1992 are selected as the test year requirements to demonstrate the development of
wastewater rates generated by the wastewater rate model. The determination of the cost of
service to be recovered through charges for wastewater service is summarized in Lines 1
through 11 of Table 10 and is indicated to be $15,346,900 based upon the proposed 9 percent
revenue increase effective July 1, 1991. In determining the cost of service to be met from
charges for wastewater service, income received from other sources not subject to rate adjust-
ment is deducted from the total revenue requirements as shown on Line 10.
Line 1 of Column 1 presents projected test year .operation and maintenance expense.
In Lines 2 through 6 of Column 2, capital costs totaling $6,790,500 are stated in terms of
debt service, capital outlay, contributions to contingency funds, General Fund return on
equity, and contributions to operating reserves. \
In allocating the test year cost of service to customer classes, revenue requirements
are apportioned among the classes on a utility basis, that is, in terms of operation and
maintenance expense, depreciation expense, and return on rate base. For a municipal utility
the total of depreciation expense and return is equal to the total cash requirements, beyond
operation and maintenance expense, to be recovered from revenues to meet capital investment
related costs.
Depreciation is the loss, not restored by current maintenance, which occurs in plant
due to decay, inadequacy, and obsolescence. Depreciation accounting is usually based on
annual percentage allowances of plant investment by type of plant adequate to return the
investment during the useful life of the facility. The total annual depreciation allowance is
not customarily .accrued as a cash reserve, but is used to meet principal payments for long
term debt or is reinvested in extensions, replacements, and additions to plant facilities. Unless
an amount equal to annual depreciation expense is reinvested in the system or is accrued for
future investment, the original investment is gradually depleted.
The Wastewater Utility depreciation expense on .the test year plant investment is
estimated to total $3,504,800. For purposes of this report annual depreciation expense is
adjusted to exclude depreciation on contributed facilities. This results in an estimated test
year depreciation expense recovered through rates and charges for wastewater service of
$1,402,500 as shown on Line 13 in Column 2 of Table 10.
Table 10
Cost of Service to be Recovered from Rates
Test Year 1992
Line
No. Category _
Total Cost of Service on a Cash Basis
Revenue Requirements
1 Operation and Maintenance Expense
2 Debt Service
3 Capital Outlay
4 Contributions to Contingency Funds
5 General Fund Return on Equity
6 Contributions to Operating Reserves
7 Total Revenue Requirements
Less Other Income Sources
8 Interest Income
9 Other Income
10 Total Other Sources
11 Total Cost of Service to be
Recovered from Rates
(1) (2) (3)
Operation
and
Maintenance Capital
Expense Costs Total
S S S
9,123,900
9,123,900
(116,400)
(80,000)
(196,400)
8,927,500
Total Cost of Service on a Utility Basis
12 Operation and Maintenance Expense 8,927,500
13 Depreciation Expense
14 Return on Rate Base
15 Total Cost of Service to be
Recovered from Rates 8,927,500
9,123.900
4.267,000
4,267,000
1,314,900
1,314,900
273,700
273,700
300,000.
300,000
634,900
634,900
6,790,500 15,914,400
(371,100) (487,500)
(80,000)
(371,100) (567,500)
6,419,400 15,346,900
8,927,500
1,380,000 1,380,000
5,039,400 5,039,400
6,419,400 15,346,900
19
In a municipally owned utility, such as the Lansing wastewater system, return on
utility rate base is the balance of the total cost of service to be derived from rates for capital
costs over and above the allowance for depreciation. Deduction of the estimated depreciation
amount from capital cost requirements to be met from wastewater service revenue leaves
$5,039,400 to be recovered from Wastewater Utility customers as return on the Wastewater
Utility rate base.
The test year cost of service expressed on a utility basis is summarized in Lines 12
through 15 of Table 10. `
Customer Classifications
In developing an equitable rate structure, revenue requirements are allocated to the
various customer classifications according to the cost of service rendered. Allocations of
these requirements to customer classes of the Wastewater Utility should take into account
wastewater flow and related waste strength characteristics of the respective classes, the
number of customers, and other relevant factors.
Customers are classified to reflect groups of customers with similar service
requirements who can be served at similar. cost. Each class represents a particular type of
service requirement or load on the System in terms of wastewater flow, biochemical oxygen
demand (BOD) strength, suspended solids strength, ammonia strength, and number of
customers served.
In this report Wastewater Utility customer classifications are as incorporated in the
current wastewater rate schedule to be:
Residential Industrial
Commercial Westside Water District
These customer. classes are assumedto exhibit similar types of System load characteristics.
Functional Cost Components and Cost Categories
As a .basis for allocating costs of service among customer classes, costs -are first
allocated to functional cost components, then allocated to cost categories, and subsequently
distributed to customer classes. Costs are identified by functional components that assimilate
the treatment process and assigned to the cost categories of volume, strength, customer, and
directly assigned costs.
Volume costs are those which vary directly with the quantity of wastewater flow
contributed. They consist of operation and maintenance and capital costs related to system
facilities which are sized on the basis of, or required because of, total wastewater flow.
Wastewater strength costs consist of operation and maintenance and capital costs
related to system facilities which are designed principally based on the projected strength
W
concentrations of contributed wastewater flow.. Suspended solids strength costs are those
costs of wastewater treatment which tend to vary according to the quantity of suspended
solids in the raw wastewater. BOD costs are those costs which are influenced in magnitude
by the BOD of the raw wastewater, and include costs related to aeration and disposal of BOD
related sludge. Ammonia costs are those costs provided in secondary treatment related to
converting ammonia in the raw wastewater to nitrate.
Customer costs comprise those costs associated with serving customers, irrespective
of the amount of wastewater flow contributed by the customer. They include the Wastewater
Utility's payments to the Board of Water and Light for meter reading, billing, and customer
accounting and collecting expense.
Directly assigned costs consist of costs associated with the Industrial Pretreatment
Program
Each functional element of cost is allocated to cost categories on the basis of the
parameter or parameters having most significant influence on the magnitude of that element
of cost. Capital costs are considered on a utility basis, that is, in terms of depreciation and
return on rate base. Return on rate base is related to an allocation of the depreciated original
cost of the wastewater system less grants and other contributions. Depreciation expense and '
operation and maintenance expense items- are allocated directly to appropriate cost categories.
Allocation of Plant Investment and Rate Base ,
The estimated investment in wastewater system facilities is allocated to appropriate
cost categories as a basis for the further distribution of capital related costs to the various
customer classes. The allocation of estimated plant investment serving wastewater customers
for the test year is shown in Table 11. The total estimated net plant investment of
$57,580,800 shown on Line 12 represents the estimated test year original cost of plant in
service less accumulated depreciation and federal and state grants. The allocation of specific
items of investment, as shown in Table 11, is made to the cost categories on the basis
previously outlined.
For example, design of collection system sewers and pumping stations is related to
flow and these investment costs are assigned to the volume cost category. Primary pumping
and grit removal facilities are designed primarily on the basis of treatment plant now and are
also assigned to the volume cost category. Primary treatment facilities are also designed
primarily on the basis of treatment plant flow and, to some extent, suspended solids. Ten
percent of these costs have been allocated to suspended solids. Secondary treatment aeration
facilities are related to and designed on a basis reflecting the quantity'of flow treated and/or
the amount of BOD and ammonia removed. For purposes of this study, investment in
secondary treatment aeration facilities is allocated 90 percent to BOD and 10 percent to `
21
Table 11
Allocation of Net Plant Investment to Cost Categories
Test Year 1992
(1) (2) (3) (4) (5) (6)
Common to All Industrial
Line Suspended Pretreatment
No. Description Total Volume BOD Solids NH3 Program
S $ $ $ S S
Collection S sy tem
1
Sewers
34,305,800 34,305,800
Pump Stations
10,936,700 10,936,700
Treatment Plant
3
Primary Pumping
1.362,100 1,362,100
4
Grit Removal
711,100 711,100
5
Primary Treatment
1,881,800 1,693,600
188,200
6
Aeration
3,153,100
2,837,800
315,300
7
Secondary Clarification
1,367,800 1,367,800
8
Tertiary Treatment
37,300 37,300
9
Chlorination/Dechlorination
66,700 66,700
10
Sludge Handling
3,713,200
1,856,600
1,856,600
11
Industrial Pretreatment Program
45,200
12
Subtotal
.57,580,800 50,481,100
4,694,400
2,044,800
315,300
13
Inventories
261,700 229,500
21,300
9,300
1,400
14
Working Capital Balance
2,038200 1,786,8W
166,200
72,400
11,200
15
Total
59,980,700 52,497,400
4,881,900
2,126,500
327,900
45,200
45,200
200
1,600
47,000
s
22
ammonia cost categories. Secondary clarification and investment costs and investment in
chlorination/dechlorination facilities are assigned to the volume cost category. Tertiary
treatment facilities are also designed on the basis of total treated volume and have been
allocated accordingly. Sludge handling facilities are designed on the basis of BOD and
suspended solids removed, and investment in these facilities has been allocated 50 percent
to each. Investment in Industrial Pretreatment Program facilities has been directly allocated
to the IPP category.
Total rate base on which the Wastewater Utility is entitled to earn a return is the sum
of net plant in service plus Wastewater. Utility plant inventories and working capital
allowance. These elements of rate base are shown on Lines 13 and 14 of Table 11 allocated
to cost categories on the basis of net plant in service.
Allocation of Depreciation Expense
The allocation of depreciation expense to cost categories is shown in Table 12. The
various functional items of depreciation expense are allocated to cost categories on the same
basis as is the investment for the corresponding system element. The test year depreciation
expense on non -contributed Wastewater Utility property of $1,380,000 is shown allocated to
cost categories on Line 12.
Allocation of Operation and Maintenance Expense
r.
Projected test year operation and maintenance expense is allocated to cost categories
in generally the same manner as plant investment and depreciation expense. This allocation
is shown in Table 13.
Operation and maintenance expense for tertiary treatment is most significantly
influenced by strength elements .with regard to backwashing filters. As such, operation and
maintenance expenses associated with tertiary treatment are allocated 20 percent to BOD, 50
percent to suspended solids, and 30 percent to ammonia.Expenses associated with the
customer and Industrial Pretreatment Program components are directly allocated to the
appropriate categories.
The net operation and maintenance expense to be recovered for wastewater service
is derived by deducting funds available from other sources from the total test year expense.
Net test year operation and maintenance expense of $8,927,500 is shown allocated to cost
categories on Line 15 of Table 13.
Distribution of Costs to Customer Classes
The total cost responsibility of each class of service may be established by developing
unit costs of service for each cost category and assigning those costs to the customer classes `
23
Table 12
Allocation of Net Depreciation Expense to Cost Categories
Test Year 1992
(1) (2) (3) (4) (5) (6)
Common to All Industrial
Line Suspended Pretreatment
N. Description Total Volume BOD Solids NH3 Program
S S S S $ S
Collection System
1 Sewers
2 Pump Stations
Treatment Plant
3 Primary Pumping
4 Grit Removal
5 Primary Treatment
6 Aeration
7 Secondary Clarification
8 Tertiary Treatment
9 Chlorination/Dechlorination
10 Sludge Handling
11 Industrial Pretreatment Program
12 Total
786,500 786,500
250,300 250,300
30,000
30,000
27,200
27200
48,400
43,600 4,800
103,200
92,900 10,300
30,200
30,200
900
900
1,900
1,900
100,700
50,300 50,400.
700
1,380,000
1,170,600 143.200 55200 10,300
24
Table 13
Allocation of Operation and Maintenance Expense to Cost Categories
Test Year 1992
(1) (2) (3) (4) (5) (6) (7)
Common to All Industrial
Line Suspended Pretreatment
No. Description Total Volume BOD Solids NH3 Customer Program
S S $ S S S S
Collection System .
1 Sewers 1,663,700 1.663,700
2 Pump Stations 1,079,900 1.079,900
Treatment Plant
3
Primary Pumping
821,000
821,000
4
Grit Removal
475,800
475,800
5
Primary Treatment
-475,800
428,200
47,600
6
Aeration
878,700'
790,800
87,900
7
Secondary Clarification
303,400
303,400`�
e
8
Tertiary Treatment
303,400
60,700
151,700
91,000
9
Chlorination/Dechlorination
490,300
490,300
10
Sludge Handling
1,685,000
842500
942,500
11
Customer
630,400
630,400
12
Industrial Pretreatment Program
316,500
316,500
13
Subtotal
-------------
9,123,900
---- ---------
5.262,300
-------------
1,694,000
---------- •
1,041,800
178,900
630,400
316,500
14
Adjustment for Other Income
(196,400)
(113200)
- (36,500)
(22,400)
(3,900)
(13,600)
(6,800)
15
Total
8,927,500
5,149,100
1,657,500
-1,019,400
175,000
616,800
309,700
0
25
based on the respective service requirements of each. To properly recognize the cost of
service, each customer class is allocated its share of Volume, Strength, and Customer costs.
Units of Service
The number of units of service required by each customer class provides a means for
the proportionate distribution of costs previously allocated to respective cost categories.
Table 14 is a summary, of the estimated units of service for the various customer classes.
Wastewater collected and treated by the Wastewater Utility is made up of two
elements: (1) sanitary wastewater flow and (2) infiltration/inflow of ground water and storm
runoff. Sanitary wastewater flow is that portion of the annual water use of each customer
class estimated to enter the sanitary sewer system.
Based on analysis of historical data, it is estimated that the amount of flow entering
the collection system through infiltration/inflow will average approximately 35 percent of the
total wastewater flow reaching the treatment plant during the test year. Each customer class
should bear its proportionate share of the costs associated with infiltration/inflow in an
equitable manner. Recognizing that a significant responsibility for infiltration/inflow is
allocable on an individual connection. basis, it is recommended that. 75 percent of total
infiltration nflow volume be allocated to customer classes based on the number of customers
in each class. The remaining 25 percent should be allocated to customer classes based on
water usage. However, the current rate structure effectively assigns all infiltration/inflow
volume to customer classes based on water usage. In order to dampen the effect of the
proposed change in methodology on individual customer classes, it is recommended that the
ultimate infiltration/inflow allocation procedures be phased in over a three-year period.
Therefore, 25 percent of the projected infiltration/inflow volume for 1992 is allocated to
customer classes based on the number of customers in each class. The remaining 75 percent
is allocated based on customer class water usage. The same figures for 1993 should be 50
percent based on customers and 50 percent based on water sales. Thereafter, infiltration/
inflow should be allocated based *on ' a 75/25 split. The distribution of test year 1992
infiltration/inflow volume to customer classes is shown in Columns 3 through 5 of Table 14.
Estimated wastewater strength quantities shown for each customer class are based on
an average domestic suspended solids concentration of approximately 294 milligrams per liter
(mg/1), an average BOD concentration of approximately 222 mg/l, and an average ammonia
concentration of approximately 21 mg/1 for the sanitary wastewater flow. These estimated
average domestic strength concentrations are based on an analysis of -recent years' influent
loadings at the treatment plant and are calculated using water sales as a base. (If infiltration/
inflow volumes are included in the base, average strengths are approximately 191 mg/1 for
suspended solids, 144 mg/1 for BOD, and 13 mg/1 for ammonia.) Based on discussions with
26
Wastewater Utility staff, it is assumed that no significant high strength customers contribute
to the System. Therefore, all customer classes are assumed to contribute domestic strength
waste.
Customer costs are distributed to customer classes on the basis of the number of bills
rendered in each customer class. The Westside Water District has. been assigned no bills
since the District provides its own retail billing services.
Customer Class Cost of Service
Costs of service are allocated to the customer classes by application of unit costs of
service to respective service requirements. Unit costs of service are based upon the total
costs previously allocated to cost categories and the total number of applicable units of
service.
Units costs of operation and maintenance expense, depreciation expense, and return
on rate base are developed by dividing the costs allocated to functional cost components by
the respective total units of service requirements.
Return on rate base is determined by. application of appropriate rates of return to
allocated rate base. The rate of return applicable for service to customers outside the City
often reflects consideration of the City's ownership of facilities, the current cost of money,
the risk involved in having made an investment to serve customers outside the City, and the
need to hold reserve capacity for future increases in use. The rate of return is based on the
relative amounts of owner's equity and long tern debt comprising the capital structure of the
Utility as well as the percentage return on owner's equity and the average or imbedded
interest cost of long term debt of the Utility.
However, the Wastewater Utility has established,a policy of not charging outside City
customers a higher rate of return than inside City customers. All customers are, therefore,
allocated return dollars based on the same rate of return; 8.42 percent.
Total unit costs by cost category are shown on Line 9 of Table 15.
The customer class responsibility for service is obtained by applying unit costs of
service to the number of units for which the customer class is responsible. The test year total
cost of service allocated to the various customer classes is shown in Table 16.
Presented in Table 17 is *a summary of the test year cost of service allocated to the
various customer classes, the projected revenue under existing rates, and the indicated
adjustment in revenue required to meet the costs of service. Line 6 of Column 4 indicates
that revenues must be increased by 8.2 percent to recover the total cost of providing waste-
water service for 1992. However, due to the one month billing lag, only eleven months of
.revenue are subject to adjustment. If analyzed on a monthly basis, the overall revenue 4
28
Line
N0. Description
1 Total Units of Service
2 (Units)
Net Operating Expense
3 Total - S
4 Unit Costs - S/Unit
Depreciation Expense
5 Total - S
6 Unit Costs - S/Unit
Return on Rate Base
7 Total - S
8 Unit Costs - S/Unit
Table 15
Unit Costs of Service
Test Year 1992
(1) M (3) (4) (5) (6) (7)
Common to All Industrial
Suspended Pretreatment
Total Volume BOD Solids NH3 Customer Program
11,840,800 10,678.700 14,127,700 991,600 498,252
Ccf lbs lbs lbs Bills
8,927,500 5,149,100 1,657,500 1,019,400 175,000 616,800
0.4349 0.1552 , 0.0722 0.1765 1.2379
1,380,000 1,170;600 143200 55.200 10,300
0.0989 0.0134 0.0039 0.0104
5,039,400 4,418,000 410,800 .179,000 27,600
0.3731 0.0385 0.0127 0.0278
9
Total Unit Cost of Service - S/Unit
0.9068
0.2071
0.0887
0.2147
1.2379
10
Total Cost of Service 15,346,960
10,737,700
2211,500
1253,600
212,900
616,800
11
User Charge Unit Cost ,of Service - S/Unit
0.4906
0.1628
0.0744
0.1823
1.2379
Direct
309,700
Direct
700
Direct
4,000
Direct
Direct
314,400
Direct
29
Table 16
Cost
of Service
Allocated to Customer Classes
-
Test Year 1992
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Common to All
Industrial
Line
Suspended
Pretreatment
No.
Description
. Total
Volume
BOD
Solids
NH3
Customer
Program
1
Unit Costs of Service
0.9068
0.2071
0.0987
0.2147
1.2379
Direct -
2
(Units)
S/Ccf
S/lb
S/lb
SAb
S/BW
Residential
{
3
Units _
5,212,200
4,281,200
5,663,900
397,500
444,048 -
4
Costs - S
6,750,800
4,726,600
886,600
502,600
85,1M
549,700
Commercial
5
Units
4,370,800
4,215,000
5,576,400
391,400
53,448
6
Costs - S
5,481,500
3,963,600
872,900.
494,800
84,000
66,200
Industrial
7
Units
1,913,700
1,889,900
2,500,3W
175,500
756
8
Costs - S
2',387,300
1,735,400
391,400
221,900
37,700
900
Westside Water District
9
Units
344,100
292,600
387,100
27,200
Y.
10
Costs - S
412,700
312,000
60,600
34,300
5,800
Industrial Pretreatment Program
11
Units
Direct
12
k
Costs - S
314,400
314,400
— ____
--
_
-
--------- --
13
Total Cost of Service - $
-------------
15,346,700
���____
10,737,600
2,211,500
1253,600
212,800
616,800
314,400
r
30
Table 17
Comparison Of Allocated Cost Of Service
With Revenue Under Eidsting Rates
Test Year 1992
(1) (2) (3) (4)
Line
No. Customer Class
1 Residential
2 Commercial
3 Industrial
4 Westside Water District
5 Industrial Pretreatment Program
6 Total
Revenue
Under
Indicated
Existing
Increase
Rates as a
(Decrease)
Revenue
Percent of
in Revenue
Total
Under
Allocated
Under
Cost of
Existing
Cost of
Existing
Service
Rates
Service
Rates
S
S
%
%
(2)1(1)
[(I)-(2)j1(2)
6,750,800
5,936,900
87.9
13.7
5,481,500
5,407,600
98.7
1.4
2,387,3W
2,398,200
1005
(0.5)
412,700
371,200
89.9
11.2
314,400
63,400
20.2
395.9
15,346,700
14,177,300
92.4
8_2 (1)
(1) Total increase in fiscal year 1992 revenues arising from the 9.096adjustment is only 8.296 due to the
one month billing lag.
31
adjustment is 9 percent. The other numbers in Column 4 indicate the approximate impact
on the various customer classes.
32
Wastewater Rate Adjustments
The initial consideration in the derivation of rate schedules for utility service is the
establishment of equitable charges to the customers commensurate with the cost of providing
that service. While the cost of service allocations to customer classes should not be construed
as literal or exact determinations, they offer a guide to the necessity for, and the extent of,
rate adjustments. Practical considerations sometimes modify rate adjustments by taking into
account additional factors such as the extent of change from previous rate levels, public
reaction to the extent of change, existing contracts, and past local. policies -and practices.
Existing Rates
A summary of existing wastewater rates is presented in Table 18. The existing rates
consist .of a monthly billing charge and a separate commodity charge applicable to each
hundred cubic feet of billed water sales. Billed water sales for residential customers are
reduced by 10 percent in summer months for purposes of computing wastewater bills.
Customers of the Westside Water District pay the same rates, but the Wastewater Utility does
not receive the portion of the revenue associated with the billing charge. Surcharge rates are
identified for BOD and suspended solids loadings in excess of allowable limits. Charges
related to the Industrial Pretreatment Program are identified based on composite samples, grab
samples, and analysis charges.
All wastewater rates and charges are identified as to the operation, maintenance, and
replacement (O,M,&R) component and the capital component.
Proposed Rates
The cost of service studies described in preceding sections of this report provide.a
basis for design of proposed rates. The proposed rate schedule is shown in Table 19 and is
similar in form to the existing schedule.
Service Charges
The proposed monthly service charge for retail customers consists of two portions.
The first part is designed to recover allocated customer costs associated with meter reading
and billing expenses charged by the Board of Water and Light. The second part is designed
to recover the customer related portion of allocated infiltration/inflow costs. The service
charge for customers of the Westside Water District is expressed as a quarterly charge. The
District has traditionally charged its customers the same fee for meter reading and billing
services as the City. This policy has been assumed to remain intact. It should be noted that
33
Table 18
Schedule of Eust-ing Rates and Charges
O,M,&R Capital Total
Service Charges
Retail Customers - S/month
1.14 -
1.14
Westside Water District - S/qtr
3.42 -
3.42
Commodity Charges
All Customer Classes - S/Ccf
1.22 0.54
1.76
Pollutant Surcharges
BOD - S/lb (a)
0.09 -
0.09
SS - S/lb (b)
0.05 -
0.05
(a) To be levied. on all contnbuted volume in
excess ofZ500lbs/day.
(b) To be levied on all contnbuted volume in
excess of I, 5M Ibs/day.
Industrial Pretreatment Program Charges
Composite Sample
226.00 -
226.00
Grab Sample
90•00 -
90•00
Analysis Charge
32.00 -
32.00
34
Table 19
Schedule of Proposed Rates and Charges
O.MAR Capital
Total
Service Charges
Retail Customers - S/month
(1) Billing Portion
1.24 0.01
1.25
(2) Infiltration/Inflow Portion
0.97 0.99
1.96
Total Retail Service Charge
2.21 1.00
3.21
Westside Water District - S/qtr
(1) Billing Portion
3.72 0.03
3.75
(2) Infiiltration/Inflow Portion
2.92 2.96
5.98
Total Service Charge (a)
6.64 2.99
9.63
(a) The City only receives the InMration4ntlow portion of the quarterly service charge.
Westside Water District retains the billing portion.
Commodity Charges.
All Customer Classes - S/Ccf
1.07 0.68
1.75
Pollutant Surcharges
BOD - S/lb (b)
0.16 0.05
021
SS - S/lb (c)
0.07 0.02
0.09
NH3 - S/lb (d)
0.18 0.03
021
(b) To be levied on all contributed volume in
excess oft, 5W lbs/day.
(c) To be levied on all contnbuted volume in
excess of 1,5M lbs/day.
(d) To be levied on all conmbuted volume in
excess of5001bs/day.
Industrial Pretreatment Program Charges
IPP Fixed Fee.- S/Month
4.65 0.06
4.71.
Composite Sample
226.00 -
226•00
Grab Sample
90.00 -
90.00
Analysis Charge
32.00 -
32.00
nz
35
the City will only receive the revenue generated by the infiltration/inflow portion of the
service charge.
Commodity Charge
The commodity charge is the same for each customer class and is designed to recover
volume related costs associated with contributed wastewater (including volume related
infiltration/inflow) and strength related costs associated with domestic strength wastes.
Surcharge Rates
Proposed surcharge rates for extra strength sewage and allowable limits are identified
in Table 19 for BOD, suspended solids, and ammonia nitrification. The rates are expressed
in terms of dollars per pound.
Industrial Pretreatment Program
The City's current Industrial Pretreatment Program (IPP) was approved -by the
Michigan Department of Natural Resources (MDNR) in 1985. There are currently 41
significant industrial users in the IPP. There are also 233 non -significant non -domestic users.
The cost of the IPP is currently financed by charging non -domestic users for sample
collection and analysis of their process waste. These charges have not provided sufficient
funding for the program in past years.
It is recommended that the Wastewater Utility maintain the existing charges for
sampling and analysis. The difference between total program costs and revenue generated
by sampling and analysis charges should be recoveredthrough an IPP fixed monthly fee to
be levied on all commercial and industrial users of the System. - This charge for 1992 is
proposed to' be $4.71 per month as shown in Table 19.
Adequacy of Proposed Wastewater Rates
Presented in Table 20 is a comparison of test ' year allocated cost of service with
revenues under existing and proposed wastewater rates. Costs shown in Column 1 are from
Table 16. As shown in Column 5, the proposed rates recover 100 percent of the total cost
of service in total and essentially 100 percent for each customer class. Column 6 of Table
20 indicates the projected average percentage change in revenues in total and by customer
class.
Typical Bills
Monthly wastewater bills for typical customers under existing and proposed rates are
shown in Table 21 and indicate that, under the proposed rates, users in the Residential
36
Table 20
Comparison Of Allocated Cost Of Service
With Revenue Under Existing and Proposed Rates
Test Year 1992
(1) (2) (3) (4) (5) (6)
Line
No. Customer Class
1 Residential
2 Commercial
3 Industrial
4 / Westside Water District
5 Industrial Pretreatment Program
6 Total
Revenue
Revenue
Under
Under
Existing
Proposed
Indicated
Rates as a
Rates as a
Increase
Revenue
Percent of
Revenue
Percent of
(Decrease) .
Total
Under
Allocated
Under
Allocated
in Revenue
Cost of
Existing
Cost of
Proposed
Cost of
Recovered' "
Service
Rates
Service
Rates
Service
from Rates
S
S
%
$
%
%
(2)1(1)
(4)1(1)
[(4)-(2)]1(2)
6,750,800
5,936,900
87.9.
6,751,200
100.0
13.7
5,481,500
5,407,600
98.7
5,481,200
100.0
1.4
2,387,300
2,398,200
1005
2,387,100
100.0
(0.5)
412,700
371,200
89.9
412,800
100.0
11.2
314,400
63,400
202
- 309,000
(1) 98.3
387.4
5,346,700
14,177,300
92.4
15,341,300
100.0
8_2 (2)
(1) Industrial Pretreatment Program revenue under proposed rates includes S245,600generated by fired monthly fees
and S63,400generated bysamplingand analysis charges.
(2) Total increase in fiscal year 1992 revenues arising from the 9.0% adjustment is only 8.2% due to the one month billing lag.
37
Table 21
Typical Customer Monthly Wastewater Bills
Under Existing And Proposed Rates
Bill Under Bill Under
Line Water Existing Proposed Increase/
No. Customer Use Rates Rates (Decrease)
(CCO S S S
1
Residential (a)
4.0
8.18
10.21
2.03
2
Residential
7.5
14.34
16.34
2.00
3
Residential'
15
27.54
29.46
1.92
4
Commercial (b) -
15
27.54
34.17
6.63
5
Commercial (b)
50
89.14
95.42
6.28
6
Commercial (b)
100
177.14
182.92
5.78
7
Industrial (b)
200
353.14
357.92
4.78
8
Industrial (b)
2,000
3,521.14
3,507.92
(13.22)
9
Industrial (b)
5,000
8,801.14
8,757.92
(43.22)
10
Westside Residential (a)
4.0 •
8.18
10.21
2.03
11
Westside Residential
7.5
14.34
16.34
2.00
12
Westside Residential
15
27.54
29.46
1.92
(a)
Proposed monthlyservice charge recovers a portion ofintltradon and intlowrelated casts
(b)
Includes proposed fired annual fee for aff Industrial Pretreatment Program participants.
I
38
M
customer class using approximately 750 cubic feet per month may expect their average
monthly wastewater bill to increase $2.00. Users in the Commercial customer class using
5,000 cubic feet per month could expect their average monthly bill to increase $6.28 over
charges under existing rates. Industrial users using 200,000 cubic feet per month could
expect their average monthly bill to decrease $13.22. The typical bills shown under proposed
rates for commercial and industrial customers include the Industrial Pretreatment Program
fixed monthly fee.
39
Environmental Protection Agency User Charge Requirements
The Federal Water Pollution Control Act Amendments of 1972 (Public Law 92-500),
as amended by the Clean Water Act of 1977 (Public Law 95-217) and the Water Quality Act
of 1987 (Public Law 100-4), were enacted with the stated objective of restoring and
maintaining the chemical, physical, and biological integrity of the Nation's waters. The Acts,
among other provisions, provide a system of federal grants for the construction of publicly
owned water pollution control facilities required to achieve the stated objective, and outline
conditions for the receipt of such grants.
Section 204(b) of the Clean Water Act, as amended, specifies the conditions related
to user charges for wastewater service, which must be met to qualify for grants for treatment
works as follows:
"Notwithstanding any other provision of this title, the Administrator shall -not
approve any grant for any treatment works under Section 201(g)(1) after
March 1, 1973, unless he shall first have determined that the applicant (A) has
adopted or will adopt a system of charges to assure that each recipient of
waste treatment services within the applicant's jurisdiction; as determined by
the Administrator, will pay its proportionate share (except as otherwise
provided in this paragraph) of the cost of operation and maintenance
(including replacement) of any waste treatment services provided by the
applicant; and (B) has legal, institutional, managerial, and financial capability
to insure adequate construction, operation, and maintenance of.treatment works
throughout the applicant's jurisdiction as determined by the Administrator..."
The U.S. Environmental Protection Agency (EPA), charged with the enforcement of
the Clean Water Act, has adopted rules and regulations, as revised and published in the
Federal Register effective most recently on February 17, 1984, regarding- user charges
pursuant to Section 204(b) of the Act. These rules and regulations are incorporated in Part 35
of Title 40, Code of - Federal Regulations. The requirements of the construction grant
regulations for user charges are considered in this section.
EPA regulation 40 CFR 35.2005 defines user charges as charges -levied on users of
a treatment works for the user's proportionate share of the cost of operation and maintenance,
including replacement, of the treatment works. Treatment works consist of all facilities used
for the collection, transmission, storage, treatment, and disposal of wastewater.
To receive Step 3 grant assistance for the construction of the treatment works, the .City
of Lansing established and agreed to maintain a system of user charges to assure that each
user within the City's Wastewater Utility service area will pay his proportionate share of
operation and maintenance costs, including replacements. Public Law 95-217, as amended,
•R
requires the user charge system to be based upon actual use, or estimates of use, of waste-
water treatment services.
The regulations state that the system of user charges must:
1. Generate sufficient revenues to offset the cost of all treatment works
operation and maintenance expense including replacements.
2. Provide that each user who discharges pollutants to the treatment
works causing increased costs will pay for such increased costs.
3. Result in the distribution of the cost of operation and maintenance of
all treatment works within the City's jurisdiction. Distribution must be
in proportion to , each user or user class • contribution- to the total
wastewater loading of the treatment works. Factors such as strength,
volume, and delivery flow rates shall be considered and included as the
basis for determining each user's contribution.
4. Provide that each ,user will be notified at least annually of the user
charge rate and the portion of user charges which are attributable to
wastewater treatment services. '
5. Provide a financial management system capable of accurately account-
ing for all revenues and operation and maintenance expenses, including .
replacements, _based on budgetary data identifying the basis for
determining the annual operation and maintenance costs and the costs
of personnel, material, energy, and administration.
6. Apportion operation and maintenance costs associated with the
treatment and disposal of infiltration/inflow to users on the basis of (a)
the allocation of all other operating costs or (b) a system which
includes consideration of one or more of the following: flow volume
of the users, land area of the users, or the number of connections of
the users.
7. Be incorporated in one or more legislative enactments of the City. If
the grant project is a'regional facility accepting wastewater from other
municipalities, such cities must adopt a user charge system for their
customers in accordance with EPA regulations.
Other considerations which must be taken into -account in establishing a user charge
system include the prohibitive use of quantity discounts to large volume users. The intent
of this requirement is to effectively distribute the cost savings due. to economies of scale to
all users of the treatment works. Additionally, if the user charge is to be based on a .per-
centage of water use charges, the water charge must be based on a constant rate per unit of
consumption.
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The methods of cost of service allocation analysis and design of rates for wastewater
service presented in this report are considered to be in compliance with EPA regulations
regarding user charges because:.
• The total cost of service allocated to the various customer classes to be
met through charges for wastewater service includes the total cost of
operation and maintenance, including replacements, of the wastewater
system as well as capital costs of the system
• The total cost of service is allocated to customer classes on the basis
of estimated class responsibility for wastewater volumes, rates of now,
and strengths, and for customer related. costs. for billing.
• Proposed rates for wastewater service are designed to reflect the cost
of service allocations and are designed to assure that each customer or
class will pay at least its.proportibnal share of all wastewater treatment
operation and maintenance costs for any level of service.
The proposed schedule of wastewater rates shown in Table 19 identifies the level of
charges related to recovery of operation and maintenance expense and replacement costs
AM,&R). These charges are the User Charge portion of the proposed rates. The balance
of charges in excess of O,M,&R charges recover allocated. capital costs not recovered by the
replacement charge portion of the User Charges.
RA
Billing Frequency
The Board of Water and Light converted to 100 percent monthly billing in November,
1990. The advantages of this conversion include:
1. A one -tire increase in billings for the usage of quarterly customers
which have used water up to the current month of conversion to
monthly billing but which would not normally be billed until a later
date. After the conversion to 100 percent monthly billing is com-
pleted, there will be no further related increases in billings.
2. A tendency to smooth out billings for the' Wastewater Utility.' The
extent of this smoothing depends on the relative number of customers
and related usage billed in each cycle. If the billings in each quarterly
cycle are approximately equal, then there 'will be little, if any,
noticeable smoothing of Utility billings.
3. A reduction in the size of the wastewater bill. This is a significant
consideration regarding the impact on low and fixed income customers.
Rather than receiving one large water bill each quarter, customers will
receive three smaller monthly bills. This should enable low and fixed
income customers to more easily budget their expenses and ultimately
improve the Wastewater Utility's late payment and collections.
4. The ability to develop more current operating and financial data and
billing statistics enabling the Wastewater Utility to better analyze and
evaluate system operations.
5. The. ability to more accurately establish representative summer water
volumes to be used for determining the wastewater billing quantities.
Disadvantages of converting to 100 percent monthly billing include increased expenses
for the Board of Water and Light due to additional staffing, equipment, vehicles, etc., to
accommodate additional meter reading, billing, and collection activities, and conversion of
existing computer billing dataprocessing procedures, software, and hardware. 'These costs
will be proportionately passed on to the Wastewater Utility.
Customer Classification
Wastewater Utility customers are currently clearly identified based on the primary use
of the customer's property as either Residential, Commercial, or Industrial. Cost of Service
allocation and rate design studies assign costs to significant customer classes exhibiting
similar types of system usage characteristics. The current customer classification is consistent
with this goal. It is recommended that the current customer class designation remain intact.
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v � '
Accounting System
In order to more accurately assign responsibility for water treatment and supply costs,
it is recommended that the Wastewater Utility re-establish an accounting system based on a
uniform chart of accounts for wastewater utilities as established by the National Association
of Utility Regulatory commissioners. This chart- of accounts would allow for a more
comprehensive capturing of costs to be .incorporated into the rate design process to more
accurately reflect the Utility's cost of providing service.
Lawn Sprinkling; and Institutional Exemptions -
Currently residential users receive a ten percent reduction in their summer water use,
for purposes of calculating their wastewater bill. This allows residential users to avoid
wastewater service charges related to water that evaporates or enters the. water table and is
not discharged. to the wastewater system. It is recommended that this policy be maintained.
No industrial customers currently receive exemptions on their water use in the
calculation of their wastewater bill: However, the Board of Water and Light has indicated
that they are investigating the establishment of a policy by which industries will not be. billed
wastewater charges for water used in cooling towers, as export water, or for landscaping
applications. It is recommended that- the Wastewater Utility staff- be actively involved in the
development of. such a volume exemption system to assure that any exemptions accurately
account for water use not returned to the wastewater system. In addition, the Wastewater
Utility must evaluate the impact of this change with respect to the potential loss of revenue
and need for rate adjustments.
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