Cost of Service Based
Water and Wastewater
Rates
City of Lawrence, Kansas
February 11, 2004
J. Rowe McKinley
Keith D. Barber
Current Utility Rate Status

Prior Rate Report Completed in August 1999

Water & Wastewater Rates Designed for Calendar
Years 2000 through 2004

02/11/04
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
No Water Rate Increases

Annual Wastewater Rate Increases of 6%
System Development Charges

First Imposed January 1, 2001 at Reduced Levels

Four-Year Gradual Phase-In Period

Current Charges Probably Less than Equity Value
Introduction
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
Key Issues

Project Approach
 General
 Water Rates
 Wastewater Rates

Rate Design Methodology

System Development Charges

Policy Issues
Key Issues
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
Revenue Adequacy

Optimal Multi-Year Financial Plan

Fair and Equitable Cost Allocations

Practical Rate and Billing Formats
 Water & Wastewater Service Charges
 System Development Charges
 Septage Charges

Customer Understanding and Acceptance
Project Approach - General
02/11/04
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
Water Rates – AWWA Principles of Water
Rates, Fees, and Charges (M1, 5th Edition)

Wastewater Rates – Water Environment
Federation (WEF) Financing and Charges
for Wastewater Systems

Guidelines presented in both manuals
have been accepted by courts and public
utility and other rate commissions
Project Approach - Water

Utility Basis of Rate Design – Permits Recognition
of Proprietary Responsibilities and Risks of Serving Outside
City Customers.
02/11/04
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
Base – Extra Capacity Cost Allocation
Methodology

Special Considerations

Wholesale Customers

University of Kansas
Water Utility
Cost Causative Components
02/11/04
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
Base – Average Water Use

Maximum Day – Peak maximum day
demand exerted on the system

Maximum Hour – Peak maximum hour
demand exerted on the system

Customer Requirements
 Meter Reading & Billing
 Meters and Services

Public Fire Protection
Water Cost of Service Concepts
Maximum Hour
Extra Capacity
Base
Annual
Average
Day
Maximum Day
Extra Capacity
Maximum Day
Extra Capacity
Treatment Plant
02/11/04
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Water Mains
Project Approach - Wastewater
02/11/04
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
Utility Basis of Rate Design

Cost Allocations – Cost Causative

Excess Strength Surcharges

Septage Charges – Based on Same Volume
and Excess Strength Charges Applied to
Other Customers
Wastewater Utility
Cost Causative Components
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
Volume – Average wastewater discharge
 Contributed wastewater
 Infiltration / Inflow (Volume Portion)

Capacity – Maximum wastewater discharge
 Contributed wastewater
 Infiltration / Inflow

Wastewater Strength (Contributed & I/I)
 Biochemical Oxygen Demand (BOD)
 Suspended Solids

Customer
 Billing
 Infiltration / Inflow (Customer Portion)
 Policy Issue
Project Approach - Methodology

Step 1 – Revenues and Revenue
Requirements

Step 2 – Cost of Service Allocations

Step 3 – Rate Design

User-Friendly Rate Model
Revenue
and Revenue
Requirements
02/11/04
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Cost of
Service
Allocations
Rate
Design
Step 1

Step 1 – Revenues and Revenue
Requirements

Step 2 – Cost of Service Allocations

Step 3 – Rate Design
Provide adequate funding of future
utility operating and capital program
needs with minimum adverse impact
on overall level of customer charges
02/11/04
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Step 2

Step 1 – Revenues and Revenue
Requirements

Step 2 – Cost of Service Allocations

Step 3 – Rate Design
To Provide an Equitable Measure of
Costs By Class for the Subsequent
Design of Cost Based Rates of
Charge
02/11/04
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Step 3

Step 1 – Revenues and Revenue
Requirements

Step 2 – Cost of Service Allocations

Step 3 – Rate Design
Establish Practical Rates That
Recognize Allocated Costs of
Service by Class, and are Also
Understandable and Fair
02/11/04
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System Development Fees
02/11/04
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
Purpose – Growth Pays For Growth

Basic Methodologies
 System Buy-In
 Incremental Cost-Pricing
 Value of Service

Asset Valuation Methods
 Original Cost (OC)
 Reproduction Cost (RC)
 Depreciation (OCLD & RCLD)
System Buy-in Methodology
02/11/04
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
Determine Total Equity Value

Determine Available System Capacity

Divide Total Equity Value by Available
System Capacity to Determine Unit Equity
Value

Apply Unit Equity Value to Customer Usage
to Determine System Development Charge
Policy Issues
1. Capital Financing
2. Debt Service Coverage
3. Fire Protection
4. Water Rate Structure
5. System Development Charges
6. I/I Cost Recovery
02/11/04
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Issue 1
Capital Financing

Capital Financing Mix?

Cash – Pay-As-You-Go

Debt

02/11/04
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
Traditional

SRF Loan Program
System Development Charges
Issue 2
Debt Service Coverage

Based on Combined Utility Approach

Large Coverage Ratio – 140%

Lower Debt Service Coverage Requirement?

02/11/04
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
Refinance Existing Debt

Reduce Required Coverage to 125%?
Rate Design Target Level – 130%?
Issue 3
Private Fire Protection Charges
02/11/04
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
It is common utility practice to charge
commercial customers a private fire
protection charge for private fire
connections serving their properties

Should a private fire protection charge be
imposed by the City of Lawrence?
Issue 4
Water Rate Structure

General

Customer Charges

Volume Charges

02/11/04
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
Uniform

Declining Block

Inverted Block

Seasonal (Conservation)
Alternative Pricing Options
Rate Structure - General
A rate structure normally consists of various
elements:
02/11/04
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
A fixed or minimum rate for the lowest
consumption levels and to recover fixed,
customer related costs.

A charge that generally varies with the
volume consumed.
Rate Structure - General
A properly structured rate should recognize
the following rules:
02/11/04
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
Yield total required revenue in a stable
and predictable manner.

Minimize unexpected changes to
customer’s bills.

Discourage wasteful use.
Rate Structure - General
02/11/04
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
Promote fairness and equity among
classes of customers.

Avoid discrimination.

Maintain simplicity, certainty,
convenience, and feasibility.

Comply with all applicable laws.
Customer Charges
1. Service Charge:

Recovers customer related costs:

Meter costs

Meter reading

Billing and collecting

Customer service

Varies by size of meter

No volume allowance or costs
included
02/11/04
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Customer Charges
2. Minimum Bill Charge:

Recovers same costs as in Service
Charge

Varies by meter size

Includes small volume allowance and
associated cost
02/11/04
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Monthly Service Charge
The monthly service charge should be
determined based on the cost to read the
meter, prepare the bill, and provide other
customer related services.
Monthly rate =
02/11/04
Page - 27
Total customer
service costs
Total number
of bills
Monthly Service Charge
Check to ensure that this minimum or fixed
monthly rate is affordable for your
community.
02/11/04
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Volume Charges
1. Uniform Volume Rate
2. Declining Block Rates (Lawrence)
3. Inverted Block Rates
4. Seasonal (Conservation) Rates
02/11/04
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Volume Charges - Uniform
1. Uniform Volume Rate
 All consumption billed at same unit
rate:
 All customers
 Separate rate by class
 Simplicity/customer understanding
are highly valued
 Customer classes have similar usage
characteristics/demand
02/11/04
Page - 30
Volume Charges - Uniform
02/11/04
Page - 31

Customer consumption data is limited

Easy to implement

Provides revenue stability

Sends conservation signal relative to Flat
Rates or Declining Block Rates
Volume Charges – Declining Block
2. Declining Block Rates
02/11/04
Page - 32

Varied demands by customer class

A single rate schedule applicable to
all classes

System costs decline with increasing
usage (economies of scale)
Volume Charges – Declining Block
02/11/04
Page - 33

Requires adequate customer class
consumption records.

Provides equitable class cost
recovery.

Appears to conflict with conservation
goals.

Provides revenue stability.

Can be difficult to implement.
Volume Charges – Inverted Block
3. Inverted Block Rates
02/11/04
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
Requires adequate customer class
consumption records.

Conservation-oriented/sends strong price
signal.

Not generally applicable to large
commercial customers.

Can result in revenue instability (requires
Rate Stabilization Reserve Fund).

Can be difficult to implement.
Volume Charges - Seasonal
4. Seasonal Rates
02/11/04
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
Applicable where there are large
seasonal demands and associated
costs.

Conservation-oriented.

Can result in revenue instability.

Can be difficult to implement.
Volume Charges - Seasonal

02/11/04
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Two alternatives:

On-Peak (Higher Unit Rate)/Off-Peak
(Lower Unit Rate).

Excess Use (Usage > 1.25 x Winter
Average @ Higher Unit Rate).
Issue 5
System Development Charges

Growth Pays for Growth



02/11/04
Page - 37
System Buy-In Methodology

Current Charges Have Not Been
Updated Since They Were Enacted In
1999

Large Increases May Be Required
Incremental Cost Pricing
Dedicated Capacity Charges?
Issue 6 - Infiltration / Inflow (I/I)
Cost Recovery

I/I Costs Must Be Recovered from
Customers

Currently Recovered:

02/11/04
Page - 38

2/3 on Customer Basis

1/3 on Volume Basis
Should this allocation basis be changed to
lower minimum charges?
Questions / Answers
02/11/04
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