Background on rate case process

Last Updated: 5/23/2017

Rate study components

When Environmental Utilities embarks on a rate setting process, staff factors in a number of considerations to ensure that regulatory and legal requirements are met, debt obligations are covered, there are adequate reserves to meet financial requirements and cover unforeseen operating expenses. Staff balances all factors, including consideration of cost impacts to customers.

Rates are established by staff using a variety of forecasts and factors (see below for details) and is reviewed by an independent, third party peer reviewer.  More information here.

Objectives of rate study

• Recovery of full revenue requirement in a fair and equitable manner
• Compliance with legal regulations (Prop 218):
- An agency cannot collect revenue beyond what is necessary to provide service.
- No charge may be imposed for a service unless that service is actually used or immediately available to the owner of the property.
- Revenues derived from the charge shall not be used for any other purpose other than that for which the charge was imposed.
- Fairness in apportionment of total costs of service amongst ratepayer classes (avoidance of subsidization within the rates)
• Maintain/enhance credit ratings
• Consistent with adopted fiscal policies
• Stable and predictable rates to deal with unexpected and adverse changes
• Simple and easy to understand and administer
• Maintain 98% customer satisfaction level of service


Basic assumptions (10-yr. financial forecast)

A computer rate model is the primary tool used for rate calculations. Staff inputs a set of assumptions that are significant drivers behind the various modeling scenarios that determine the proposed rate case.

These assumptions are part of a 10-year financial forecast and include:
• Fuel: 18% over 10 years
• Power (RE 3%, PG&E 2.5%)
• Inflation: 2%
• Worker’s Comp: 3%
• Indirect Charges (city service that support the utility operation): 5% annually
• Growth: 1%
• Salaries: Negotiated Contracts (2%, 0%)


Factors that influence costs

Water system cost structure


Water rates are calculated to meet both fixed and variable costs. In Roseville, roughly 80 percent of costs associated with water delivery is fixed (e.g., operation and maintenance of the water treatment plant, infrastructure, meters and billing). Approximately 20 percent of (e.g., water production, power). A factor that must be considered during rate development, is that when residential and commercial water use decreases as a result of state mandates, the resulting revenue reduction could compromise Environmental Utilities ability to meet financial and service obligations.

Additional factors that influence costs

  • Technology Investments (Keeping pace with technology): Updating the current outdated (two decades old) billing system, Advanced Meter Infrastructure ($4.8M), Enterprise Resource Planning ($1.8M). Note: Costs of these major projects are shared with Roseville Electric
  • Salaries: Restructuring/Right-Sizing and Succession Planning (addressing the aging workforce). New positions assumed in the rate study include, in FY 17/18: one Refuse Truck Driver, two Business Services Senior Analyst positions (Administration), one Solid Waste Billing Technician, one Street Sweeping Operator, one Administrative Analyst (Legislative), one Industrial Waste Technician (Wastewater), one Preventative Maintenance Supervisor (Wastewater), one Preventative Maintenance Superintendent (Wastewater), and one Interpretive Services Specialist (Utility Exploration Center). For FY 18/19, the model assumes one Safety Specialist, one Refuse Truck Driver, one Senior Automation Engineer, and one Administrative Technician.
  • Rehabilitation: Pay-go basis (No financing costs)
  • Reserve Policies: Healthy reserves can limit future rate adjustments, and help address regulatory and environmental uncertainty
  • Unfunded State Mandates:
    • Organics Collection (Program development). Also note the increased tipping fee at Landfill (will increase again next year due to minimum wage increase).
    • Long-Term Water Use Efficiency Proposal: (Dept. of Water Resources) May require additional actions to meet a new and increased water efficiency targets, building off of SB 7X7 (2009). Requires more reporting, more water efficiency programming, potential water budgets (tied to parcel mapping), more public outreach and potentially investments to increase drought resiliency (maybe beyond what we would do on our own). Timeframe: late 2017 and ongoing.
    • Extension of Emergency Drought Regulations: Will continue to artificially reduce water utility revenue even when there is no drought in the region, more so by continued State messaging that water conservation is still needed (even though it is not needed locally).Timeframe: Extended up to 270 days. 
    • New Environmental Laboratory Accreditation Program (ELAP) lab standards: A1dds additional State reporting and testing protocols that may require more resources for our lab to comply. Timeframe: late 2017/early 2018 and ongoing.
    • AB 401: Low Income Rate Assistance Program: May add state required local subsidies to low income customers. Unclear as to whether this will end up a centralized or local program. Will likely be funded with local resources either way. Timeframe: 2018 is likely. 
    • Statewide Water Tax (Water Public Goods Charge) - Timeframe: 2018.
    • Water Quality Control Plan Amendments to the Bay Delta Plan: Potential worst case, the State Water Board could impose arbitrary flow regimes on the Lower American River, which could disrupt water supply reliability by draining Folsom Reservoir; worst case – may need to accelerate efforts to secure redundant water supplies that can meet customer demands citywide. Timeframe: 2018-2019.
New cost savings

A contingency fund has been established in the Water and Wastewater utilities. Future budgeting has been reduced by up to 20% for high cost items such as chemicals and power. If additional funds are needed to meet expenses, they will be obtained from the contingency fund. At end of fiscal year, any unspent funds will go to Rate Stabilization Fund.

Proposed rate increases for FY 2018 & FY 2019

Proposed Rate Increases 2017-2019 - Impact on Typical Residential Customer

Current FY 16/17 Bill

Approximate Proposed FY 17/18 Rate Adjustment (2)

 FY17/18 Estimated Increase (eff.7/1/17)

FY 17/18 Estimated Bill

Approximate Proposed FY 18/19 Rate Adjustment (2)

 FY18/19 Estimated Increase (eff.7/1/18)

FY 18/19 Estimated Bill

Water

$36.25

7%

$2.54

$38.79

7%

$2.74

$41.53

Wastewater

$34.70

6%

$2.08

$36.78

6%

$2.21

$38.99

Solid Waste

$23.40

2%

$0.47

$23.87

2%

$0.48

$24.35

Total(2)

$94.35

5.4%

$5.09

$99.44

5.5%

$5.42

$104.86

 (1) Rates are for a typical residential customer  using 1,200 cubic feet of water per month, flat rate sewer, single 90 gallon refuse bin, and single 90 gallon green waste bin.
(2) Rate adjustments are approximate. Actual charges may vary due to rounding.

Regional comparison and affordability index

An element for rate setting includes utility rate comparisons regionally as well as comparing rates to industry key performance indicators.



For most households the cost of water and wastewater utilities comprise less than 1% of annual household income.



American Water Works Assoc. Key Performance Indicator. Based on national averages. Median household income from U.S. Census data.


Rate projections

The green bars represent expenses for each utility. The blue lines indicate projected revenue with the proposed rate increases. The red line represents revenue with no rate increases. Fiscal years 2018 and 2019 show expenses slightly exceeding revenue. This is intentional use of reserves (savings) to meet expenses, thus minimizing the proposed rate increase.



Fiscally sound utility services

The utilities have adopted financial policy targets for emergency reserves (to meet industry standard, maintain good credit ratings, and provide financial capacity to absorb unexpected costs). The approach is to meet those goals over a period of years, to keep rate increases manageable and in smaller increments. The red line shows the trend toward meeting reserve goals assuming half of the proposed rate increases.






Fund summaries

The fund summaries for each utility is available here.  They are rate model outputs for each utility. The summaries identify the current and projected budgets for the next two fiscal years. The figures shown for revenue, expense, and reserve amounts assume the proposed rate increases.