HomeMy WebLinkAbout17 - Recycled Water Rate EstablishmentCITY OF
NEWPORT BEACH
City Council Staff Report
June 10, 2014
Agenda Item No. 17.
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: George Murdoch, Acting Municipal Operations Department Director - (949) 644-
3011, gmurdoch @newportbeachca.gov
PREPARED BY: Rachell Wilfert
PHONE: 949 - 644 -3010
TITLE: Recycled Water Rate Establishment
ABSTRACT:
The City of Newport Beach provides non - potable (recycled) water to five customers for the
purposes of irrigating parks, schools, center medians and golf courses. Recycled water is
purchased from the Orange County Water District through the Green Acres Project. The
current charge for recycled water includes fixed fees and a commodity rate set at 80% of the
potable water rate.
The Municipal Operations Department retained the consulting services of HF &H Consultants,
LLC (HF &H) to prepare a recycled water rate study. The study analyzed the cost of service and
made recommendations regarding the rate and structure in compliance with State law. The
study concluded that a rate adjustment is recommended as well as a different structure moving
away from tracking the potable water rate.
RECOMMENDATION:
a) Review the results and proposed recommendations of the recycled water rate study;
b) Direct staff to send rate notices to customers in compliance with Proposition 218 and
Resolution No. 2009 -58; and
c) Set the date of August 12, 2014 for tabulation of protests and public hearing of proposed
rates pending results of protests.
FUNDING REQUIREMENTS:
There are no funding requirements required for this action. Should Council approve of the
recommendations, a recycled water rate and structure may be established unless written
protests against the proposed rate are presented by a majority of owners of the parcels subject
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to the rate.
DISCUSSION:
Background:
Recycled water is treated wastewater provided by the Orange County Water District (OCWD)
under the Green Acres Project (GAP). GAP is a water conservation effort that provides
recycled water for landscape irrigation at parks, schools, center medians, and golf courses.
The City currently has five recycled water customers totaling 14 connections. The customers
include Big Canyon and Newport Beach Country Club golf courses; East Bluff School, Our
Lady Queen of Angels School, and the City which uses recycled water for irrigation of some
roadway medians and parks.
In 1991, the City entered into an agreement with OCWD for the distribution and sale of GAP
water. The agreement stipulates that recycled water rates may not exceed 80% of the potable
water rate. The agreement term is for 25 years with five 5 -year automatic extensions, with an
estimated ending term year of 2041.
Following the 1991 agreement, the City entered into "End User Agreements" with customers in
1996 for a 10 -year term. These agreements, now expired, included provisions that OCWD and
the City would provide funding to modify golf courses and construct pump stations to facilitate
the use of recycled water. In 2011, the City and the Big Canyon Country Club entered into a
new agreement that provided for the delivery and sale of recycled water, and a pump station
license agreement. All past and current agreements set the recycled commodity rate at 80% of
the potable water rate.
In 1995, the potable water rate was $1.94 per Hundred Cubic Foot (HCF). Eighty percent of
that rate was $1.53 /HCF. Currently the potable water rate is $3.08 /HCF and the recycled
rate is $2.47 /HCF. In the last nineteen years the potable water rates have increased
significantly mostly due to increased import water costs from Northern California and Colorado
River. Recycled water rates have tracked these rate increases. Our customers and staff
recognized the need to set the recycled rate to the true cost to provide this service. Staff
conducted a Request for Proposal (RFP) in 2013 to study the rate and selected HF &H.
Recycled Water Rate Study:
HF &H collected data from staff including past, present and estimated expenditures and
revenue requirements; the 2011 cost allocation plan prepared by MGT America, Inc.; and the
2013 Fee Schedule adopted by City Council on October 22, 2013. Staff provided pump station
maintenance costs and manpower to operate and maintain the system. HF &H has prepared
the attached memorandum for review and comment.
As a result of this analysis, staff is recommending an adoption of a five -year rate with a 2%
annual adjustment to reflect the anticipated future increases in costs associated with
operations and maintenance of the system. Additionally, in the event OCWD increases the cost
of recycled water by more than 2 %, staff recommends that the rate structure include an
adjustment to reflect the actual commodity cost charged by OCWD.
Staff presented these results to the Finance Committee on April 29, 2014. The Committee
approved the recommendation to move the item to the City Council for discussion. Below is a
summary of the analysis and recommendations.
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The current rates for recycled water are divided into two components:
Fixed charge - a monthly service charge based on size of connection.
Commodity charge - a monthly charge for all customers based on 80% of the potable
water rates.
Under the new rate structure the recycled commodity costs will not be linked to potable water
rates.
The proposed methodology for the new rate structure has three components:
Fixed charge - a monthly service charge based on size of connection.
Commodity charge - a monthly charge for all customers based on the actual commodity
cost charged by OCWD
Pump Station charge - a monthly charge for users of recycled water pump stations based
on the cost to operate, maintain, and replace the stations.
The total revenue requirement for fiscal year 2014 -15 is estimated to be $279,366 and consists
of:
Fixed costs
o Meter Reading ($1,514)
o Meter Replacement ($2,543)
o Overhead - Other City Departments ($12,208)
o Administration - MOD Staff Time ($25,433)
o Other agency fees - Health, County, etc. ($2,034)
Commodity cost
o The cost to purchase recycled water from OCWD ($173,417) or $0.86 /HCF
Pump Station costs
o Inspections ($7,021)
o Maintenance - Production, SCADA, Corrective ($13,109)
o Rehab & Replacement ($42,087)
Proposed Five Year Rate Establishment
Monthly Service Charge
Current
Year 1
Year 2
Year 3
Year 4
Year 5
5/8" or 3/4"
$13.82
$18.91
$19.29
$19.68
$20.07
$20.47
1"
$23.03
$31.53
$32.16
$32.80
$33.46
$34.13
1 W,
$46.06
$63.05
$64.32
$65.60
$66.91
$68.25
2"
$73.70
$100.88
$102.90
$104.95
$107.05
$109.19
3"
$138.18
$189.15
$192.94
$196.80
$200.73
$204.75
4"
$230.30
$315.25
$321.56
$327.99
$334.55
$341.24
6"
$460.61
$630.50
$643.11
$655.98
$669.10
$682.48
8"
$736.98
$1,008.81
$1,028.99
$1,049.57
$1,070.56
$1,091.97
Commodity Charge
Per HCF
$2.46
$0.855
$0.872
$0.890
$0.907
$0.926
613
Pump Station Charge
Per HCF none $0.361 $0.368 $0.375 $0.383 $0.391
Under the proposed rate structure, recycled water users will see a reduction in their bill. Even accounting
for a two percent annual increase beginning in the second year of the new structure, the updated rates
provide a significant savings for the City's recycled water users, while still allowing the City to maintain
infrastructure to provide recycled water service.
The City invested Water Enterprise funding to construct the pump stations, service connections, backflow
devices, swivel ells, and piping. City and OCWD contributed funding to golf courses for modifications to
accept the recycled water. Staff feels the revenue generated above the cost of service since 1995 has
reimbursed the water fund for these expenditures.
Estimated Cost Savinqs for Recvcled Water Users
Customer Name
Meter
Average Monthly
Current
Year 1
Difference
Size
Flow (HCF)
Monthly Bill
Monthly Bill
Newport Country
Club
6"
6,550
$16,820
$8,717
$ (8,103)
(48)%
Our Lady Queen
2"
151
$446
$230
$ (215)
(48)%
of Angds
Big Canyon
Country Club
8"
5,256
$13,668
$5,504
$ (8,164)
(60)%
Big Canyon
Country Club
6"
2,463
$6,518
$3,625
$ (2,894)
(44)%
Eastbluff School
3"
321
$928
$464
$ (464)
(50)%
Next Steps:
Upon incorporation of the City Council's comments and recommendations, staff will be required to issue a
Proposition 218 notice to the owners of parcels that are subject to the recycled rate pursuant to California
Constitution Article XIII D, Section 6. There will be a 45 -day public notice period.
Following the public notice period, written protests will be tabulated at the August 12, 2014 Council
meeting. City Council may then conduct a public hearing on the proposed rate and proceed with rate
establishment unless written protests against the proposed rate are presented by a majority of owners of
the parcels subject to the rate.
ENVIRONMENTAL REVIEW:
Staff recommends the City Council find this action is not subject to the California Environmental
Quality Act ( "CEQA ") pursuant to Sections 15060(c)(2) (the activity will not result in a direct or
reasonably foreseeable indirect physical change in the environment) and 15060(c)(3) (the
activity is not a project as defined in Section 15378) of the CEQA Guidelines, California Code
of Regulations, Title 14, Chapter 3, because it has no potential for resulting in physical change
to the environment, directly or indirectly.
NOTICING:
The agenda item has been noticed according to the Brown Act (72 hours in advance of the
meeting at which the City Council considers the item).
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ATTACHMENTS:
Description
Attachment A - HF &H Recycled Water Technical Memorandum
615
,HF H CONSULTANTS, LLC
201 North Civic Drive, Suite 230
Walnut Creek, California 94596
Telephone: 925 /977 -6950
Fax: 925/977 -6955
www.hfh- consultants.com
ATTACHMENT A
Managing Tomorrow's Resources Today
TECHNICAL MEMORANDUM
To: George Murdoch, City of Newport Beach
From: John Farnkopf, Sima Mostafaei, HF &H Consultants
Subject: Recycled Water Rate Update
Date: May 30, 2014
Robert D. Hilton, CMC
John W. Farnkopf, PE
Laith B. Ezzet, CMC
Richard J. Simonson, CMC
Marva M. Sheehan, CPA
Robert C. Hilton, CMC
In preparing this recycled water rate update, expenses and revenues were projected through FY
2018 -19. Based on these projections, revenue increases were derived to meet the funding
requirements. The recycled water rate structure was also redesigned to better align the revenue
with actual costs. The following findings and recommendations were made.
I. FINDINGS AND RECOMMENDATIONS
1. Key Assumptions. Rates were set to generate revenue sufficient to fund the City's
recycled water systems operations and maintenance expense, the cost of purchasing
recycled water from Orange County Water District (OCWD), and capital replacement
expense related to pump stations and meters.
2. Rate Design. The City's current recycled water customers pay the sum of two charges: a
monthly fixed charge that is based on the size of the connection, and a commodity
charge based on metered water use during the monthly period. The rate charged is
based on 80% of the potable water rate. We recommend unlinking the recycled water
rate from the potable water rate and aligning the recycled fixed and commodity charges
with the fixed costs and the cost of purchased water from OCWD, respectively. In
addition to the fixed and commodity charges, pump station users will be charged a
pump station charge based on the cost to operate and maintain the stations and convey
recycled water.
3. Projected Rates. The rate projections are shown in Figure 1 -1.
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,HF H CONSULTANTS LLC
Managing Tomorrow's Resources Today
MEMORANDUM
Page 2 of 7
Figure 1 -1. Current and Proposed Recycled Water Rates
Current YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 51
5/8" or 3/4"
$13.82
1"
$23.03
1 1/2"
$46.06
2"
$73.70
3"
$138.18
4"
$230.30
6"
$460.61
8"
$736.98
$18.91 $19.29 $19.68 $20.07 $20.47
$31.53 $32.16 $32.80 $33.46 $34.13
$63.05 $64.32 $65.60 $66.91 $68.25
$100.88 $102.90 $104.95 $107.05 $109.19
$189.15 $192.94 $196.80 $200.73 $204.75
$315.25 $321.56 $327.99 $334.55 $341.24
$630.50 $643.11 $655.98 $669.10 $682.48
$1,008.81 $1,028.99 $1,049.57 $1,070.56 $1,091.97
Rate per HCF $2.46 $0.86
Rate per HCF none $0.36
II. REVENUE REQUIREMENT PROTECTIONS
$0.87 $0.89 $0.91 $0.93
$0.37 $0.38 $0.38 $0.39
The City's FY 2013 -14 revenue requirement served as the basis for determining the revenue
requirement projections through FY 2018 -19. Figure 2 -1 summarizes the sources and
assumptions for the data as well as the projected expenditure trends:
Figure 2 -1. Revenue Requirement Projections
Total Revenue Requirement $264,994 $279,366 $287,030 $292,075 $297,213 $302,446
Annual Change 5% 3% 2% 2% 2%
617
Current
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
ting Costs
$40,488
$41,188
$41,901
$42,626
$43,363
$44,114
3sed Recycled Water
$167,598
$173,417
$179,438
$182,810
$186,245
$189,745
Station Operating & Maintenance
$39,408
$47,218
$48,104
$49,007
$49,927
$50,864
ciation
$17,500
$17,543
$17,587
$17,632
$17,678
$17,724
Total Revenue Requirement $264,994 $279,366 $287,030 $292,075 $297,213 $302,446
Annual Change 5% 3% 2% 2% 2%
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0 Managing Tomorrow's Resources Today
MEMORANDUM
Page 3 of 7
• Operating - This cost category includes administration and overhead expenses that are
calculated as 10% of the total recycled water revenue requirement and 1% of the
budgeted general fund overhead charged to the water fund, respectively. During the
projection period, the City's operating expenses are projected to increase gradually at
about 1.73% per year, based on the five -year historical average of general inflation for
the Los Angeles area.
• Purchased Water -This cost category for FY 13 -14 was based on the actual water
purchases in FY 12 -13 multiplied by the cost of purchased water from OCWD of $360
per acre foot. During the projection period, the City's purchased water costs are
projected to increase gradually at about 1.88% per year, based on the five -year historical
average of OCWD purchased water charges per acre foot.
• Pump Station Operating and Maintenance - This cost category for FY 13 -14 was based
on the actual cost of inspections, scheduled and corrective maintenance, source
changeovers and pump station rehabilitation and maintenance as provided by the city.
During the projection period, the City's pump station operating and maintenance costs
are expected to increase gradually at about 1.73% per year, based on the five -year
historical average of general inflation for the Los Angeles area.
• Depreciation - This cost category includes replacement costs for pump station facilities
and water meters. The annual pump station facility replacement cost was based on
$600,000 in construction costs, amortized over 40 years. The annual meter replacement
cost was based on the American Water Works Association's standard cost of $259 per
meter per year, amortized over 15 years. During the projection period, the City's pump
station facility replacement costs are held constant at $15,000 per year, while the meter
replacement costs are projected to increase gradually at about 1.73% per year, based on
the five -year historical average of inflation for the Los Angeles area.
III. RATE DESIGN
Current Rate
The City currently has five recycled water customers totaling 14 connections. These customers
pay the sum of two charges every month for water service: a basic service charge based on the
size of the service connection plus a commodity charge based on metered water use during the
billing period. In 1991, the City entered into an agreement with OCWD for the distribution and
sale of recycled water. The agreement stipulated that the recycled water rate may not exceed
80% of the potable water rate. It is the City's current practice to charge customers 80% of the
potable water rate based on that agreement.
M.
,HF H CONSULTANTS LLC
Managing Tomorrow's Resources Today
MEMORANDUM
Page 4 of 7
Proposed Rate Structure
Under the new rate structure, the recycled water rates will no longer be linked to 80% of the
potable water rates. The proposed rate structure is based on the FY 2014 -15 revenue
requirement, and categorizes the expenses into three categories: fixed costs, variable costs and
pump station - related costs. Fixed costs are considered fixed because they do not vary based on
flow, and include the annual cost of meter reading and replacement, as well as administrative
and overhead. Variable costs vary because they are based on the amount of water purchased,
and therefore, are solely comprised of the annual cost of purchased water from OCWD. Pump
station - related costs are comprised of inspections, maintenance, and rehabilitation &
replacement that are directly related to the pump stations. Figure 3 -1 presents the breakdown of
the FY 2014 -15 revenue requirement by cost category:
Figure 3-1. FY 2014 -15 Revenue Requirement by Cost Category
FY2014 -15
Ixed Costs
Administration
$25,433
Overhead
$12,208
Meter Reading
$1,514
Meter replacement
$2,543
Other agency fees
$2,035
otal Fixed Costs
$43,732
ariable Costs
Purchased Water $173,417
>tal Variable Costs $173,417
xmp Station Costs
Inspections $7,021
Maintenance $13,109
Rehab & Replacement $42,087
>tal Pump Station Costs $62,218
Total Revenue Requirement $279,366
In order to determine the monthly charge by size of connection, we first converted the number
of active meters to equivalent meter units (EMU) as shown in Figure 3 -2. The EMU multiplier
by meter size is the same multipliers used to determine the fixed charge by meter size for
potable water rates. The monthly charge for an EMU of 1.00 is derived by dividing the total
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MEMORANDUM
Page 5 of 7
fixed costs of $43,732 by the total number of EMUS or 192.70. This quotient was then divided by
12 to convert from an annual charge of $226.94 to a monthly charge of $18.91. The service
charges were then graduated using the EMU multipliers, the effect of which is to increase the
service charges for the larger services. Note the total annual revenue from fixed charges in
Figure 3 -2 is equal to the total fixed costs presented in Figure 3 -1.
Figure 3 -2. Calculation of Proposed Monthly Fixed Charges
The commodity and pump station charges were derived using the FY 2012 -13 monthly meter
readings in HCF for all customers, and FY 2012 -13 monthly meter readings for pump station
customers in HCF, respectively. Figure 3 -3 presents the derivation of the proposed commodity
and pump station charges for FY 2014 -15:
Figure 3-3. Calculation of Proposed Commodity and Pump Station Charges
Total
FY14 -15
FY14 -15
Monthly
FY 14 -15
Cost Category Costs
Active
EMU
Total
Service
Annual
Meter Size
Accounts
Multiplier
EMUS
Charge
Revenue
a
b
a *b
c
a *c *12
5/8" or 3/4"
0
1.00
0
$18.91
$0
1"
0
1.67
0
$31.53
$0
1 1/2"
0
3.33
0
$63.05
$0
2"
8
5.33
42.67
$100.88
$9,684
3"
3
10.00
30.01
$189.15
$6,810
4"
0
16.67
0
$315.25
$0
6"
2
33.34
66.68
$630.50
$15,132
8"
1
53.34
53.34
$1,008.81
$12,106
14
192.70
$43,732
The commodity and pump station charges were derived using the FY 2012 -13 monthly meter
readings in HCF for all customers, and FY 2012 -13 monthly meter readings for pump station
customers in HCF, respectively. Figure 3 -3 presents the derivation of the proposed commodity
and pump station charges for FY 2014 -15:
Figure 3-3. Calculation of Proposed Commodity and Pump Station Charges
Using the FY 2014 -15 rates as calculated in Figure 3 -2 and Figure 3 -3, a five -year rate plan was
prepared based on the City's recycled water revenue requirements as presented in Figure 2 -1.
The rates included in the 5 -year plan reflect 2 %" annual rate increases across the board starting
620
FY12 -13
FY14 -15
FY14 -15
Usage
Charge
Cost Category Costs
(HCF)
per HCF
Variable Costs $173,417
202,793
$0.86
Pump Station Costs $62,218
172,426
$0.36
Using the FY 2014 -15 rates as calculated in Figure 3 -2 and Figure 3 -3, a five -year rate plan was
prepared based on the City's recycled water revenue requirements as presented in Figure 2 -1.
The rates included in the 5 -year plan reflect 2 %" annual rate increases across the board starting
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in Year 2 to keep pace with the increase in the revenue requirements. The proposed 5 -year rate
plan is shown in Figure 3-4.
Figure 3-4. Five Year Recycled Water Rate Projections
Customer Bill Comparisons
Figure 3 -5 presents a comparison of monthly customer bills using the current rate structure and
the recommended revised rate structure. The rates used to calculate the revised bills are the
Year 1 charges presented in Figure 3-4. It is notable that all current recycled water customers
will experience no less than a 44% bill decrease with the recommended structure change.
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YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
Annual Rate Increases
2%
2%
2%
2%
Monthly Service Charge
5/8" or 3/4"
$18.91
$19.29
$19.68
$20.07
$20.47
1"
$31.53
$32.16
$32.80
$33.46
$34.13
11/2"
$63.05
$64.32
$65.60
$66.91
$68.25
2"
$100.88
$102.90
$104.95
$107.05
$109.19
3"
$189.15
$192.94
$196.80
$200.73
$204.75
4"
$315.25
$321.56
$327.99
$334.55
$341.24
6"
$630.50
$643.11
$655.98
$669.10
$682.48
8"
$1,008.81
$1,028.99
$1,049.57
$1,070.56
$1,091.97
Monthly Commodity Charge
Rate per HCF
$0.86
$0.87
$0.89
$0.91
$0.93
Monthly Pump Station Charge
Rate per HCF
$0.36
$0.37
$0.38
$0.38
$0.39
Customer Bill Comparisons
Figure 3 -5 presents a comparison of monthly customer bills using the current rate structure and
the recommended revised rate structure. The rates used to calculate the revised bills are the
Year 1 charges presented in Figure 3-4. It is notable that all current recycled water customers
will experience no less than a 44% bill decrease with the recommended structure change.
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Figure 2 -5. Customer Bill Comparison
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Average
Monthly
Current
Revised
Flow
Monthly
Monthly
Difference Difference
Cos tome rName
Meter Size
(HCF)
Bill
Bill
($)
( %)
Newport Beach Country Club
6"
6,650
$16,820
$8,717
($8,103)
-48%
Our Lady Queen of Angels
2"
151
$446
$230
($215)
-48%
Big Canyon Country Club
8"
5,256
$13,668
$5,504
($8,164)
-60%
Big Canyon Country Club
6"
2,463
$6,518
$3,625
($2,894)
-44%
Eastblaff School
3"
321
$928
$464
($464)
-50 %"
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