You are on page 1of 7

CITY OF POWAY,

CALIFORNIA

SEWER RATE STRUCTURE


STUDY

FINAL REPORT

MARCH 9, 2007
Sewer Rate Structure Study

BACKGROUND
The City of Poway, California (City) is located in north San Diego County. The City operates a
sewer utility system as part of a water and sewer Enterprise Fund within the City Government.
The sewer system collects wastewater from City customers and transports it to an
interconnection with the City of San Diego Metropolitan Wastewater Department, which ultimately
treats the wastewater and discharges it into the Pacific Ocean. As an Enterprise Fund, the City’s
utilities collect revenue from water and sewer customers that fund the ongoing operation and
maintenance of the systems. Service is provided to approximately 12,000 water and sewer
customers, of which about 11,200 are single-family residences.

Prior to 1997 the City employed a flat rate structure for residential sewer customers. In 1997, the
City conducted a utility rate study and modified its rate structure in order to assess customer
charges that were proportional to their use of the system. The study concluded that customer
use of the system should be proportional to metered water usage. The existing structure as it
relates to residential sewer customers includes:

• Seven usage tiers that correspond to metered water usage;


• A sewer return factor of 85% to recognize that not all metered water is returned
as sewer flow;
• A sewer cap, currently set at 51 hundred cubic feet (hcf) bi-monthly, to
recognize that water usage above that level is probably outdoors and is not returned as
sewer flow; and,
• Sewer demand placed at the lowest 3-year average winter water use,
recognizing that outdoor use is be minimized during this period.

Residential commodity charges resulting from the existing structure are shown in Exhibit 1.

Exhibit 1: Distribution of Residential Sewer Bills (Commodity Portion Only)

Bi-Monthly Bill
$125 100%

$100 80%

Percentage of
Bill Amount

Customers
$75 60%

$50 40%

$25 20%

$0 0%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55

HCF

STUDY OBJECTIVES
In 2006, in an effort to ensure that residential sewer charges are assessed equitably, the City
Council commissioned Raftelis Financial Consultants, Inc. (RFC) to conduct a study to identify
and evaluate alternative sewer rate structures. The Study scope was confined to residential
commodity charges only. Non-residential charges and the fixed charge component of residential
bills and were not applicable to the scope of this study.

RFC conducted an analysis of the existing rate structure dynamics. Results are summarized in
Exhibit 2.

1
Sewer Rate Structure Study

Exhibit 2: Analysis of the Existing Rate Structure

Exhibit 2 illustrates two opportunities the City may have to address customer questions and
improve upon the existing rate structure. First, if we look at the rate paid for the average use
within each tier, the amount per hcf decreases significantly. For example, tier 1 customers pay,
on average, $5.84 per hcf of sewer usage, while tier 7 customers pay $2.01 per hcf. Second,
customers may be confused by a seven tier system that generates an identical bill for usage at 27
hcf and 37 hcf (the range of usage defined as tier 5).

RFC believes that the City may be able to address these opportunities by considering changes to
the residential sewer rate structure. RFC did not find inherent deficiencies in the existing rate
structure that would necessitate any change at this time. State law requires that charges be
proportionate to system usage and the existing structure meets that requirement. The question is
whether the City believes the current structure best approximates system usage. If the City
chooses to redefine how it approximates a customer’s system usage, it must also revise its rate
structure to match the new definition.

UTILITY PRICING OBJECTIVES


Utilities select an appropriate rate structure based on how they prioritize pricing objectives.
Common pricing objectives include:

• Financial Sufficiency - The rate structure should not only adequately recover
the costs associated with providing service, but also ensure enough revenue is generated
to meet maintenance and rehabilitation requirements to ensure system reliability.
• Cost of Service Based Allocation - The rate structure should ensure that
customers contribute equitably based on their system usage.
• Minimize Customer Impacts - The rate structure should be developed such that
adverse rate impacts on customers are minimized.
• Rate Stability - The rate structure should minimize dramatic rate increases or
decreases from year to year.
• Affordability Through Conservation - The rate structure should maximize the
opportunity for all customers to influence their overall sewer bill by controlling their winter
water use.

2
Sewer Rate Structure Study

• Simplicity - The rate structure should be easy for City customers to understand,
utilizing a moderate level of educational tools.
• Legality - The rate structure should continue to be consistent with the rate
setting methodologies provided by Water Environment Federation and applicable laws
(including California Proposition 218 and State Water Resources Control Board
direction).
• Revenue Stability - The rate structure should provide for a steady and
predictable stream of revenues to the utility.
• Conservation - The rate structure should encourage water conservation as well
as assist in managing system demand.

Utilities may select different rate structures based on their particular characteristics and unique
circumstances. For instance, a utility that prioritizes conservation may adopt a rate structure that
surcharges excessive or non-essential use, while another utility with excess capacity that
prioritizes economic development may reduce rates as usage increases. As our example shows,
pricing objective prioritization often represents a trade-off between competing utility goals. In
addition, a utility’s prioritization of pricing objectives may evolve over time, necessitating a change
in their rate structure.

Sewer Rate Structure Options


The City has several distinct rate structure options for residential sewer customers. Alternatives
include:

• Retain the existing rate structure – The existing structure meets all the
requirements of State law, and provides charges that are proportionate to system usage.
• Modify the existing rate structure – The City may choose to modify the existing
structure by adding, reducing, or modifying tiers to address its highest priority pricing
objectives.
• Implement a flat rate structure – The City may choose a flat sewer rate
whereby all residential customers receive identical bills for service.
• Implement a uniform rate structure – The City may charge the same rate for
each unit of sewer use, based on metered water flow.

In addition, the City may make adjustments that are independent of which structure is selected:

• Change the existing sewer cap –


Modify the sewer cap to reflect the maximum amount of metered water usage that
residential customers are expected to return as sewer flow.
• Adjust the method for determining
winter use – Modify the current practice of averaging three years of winter data at a rate
of 85% to determine sewer use.

COMPARISON OF RATE STRUCTURE OPTIONS


As part of this Study, RFC was tasked with identifying the strengths and weaknesses of each rate
structure option.

Existing Rate Structure


As mentioned, there are no deficiencies in the existing rate structure that would necessitate a
change. Existing rates are in compliance with applicable State laws and accepted industry
practice. The City should make a rate structure change only if it believes another rate structure
better addresses its current prioritization of pricing objectives. In addition, maintaining the
existing structure has the benefit of eliminating implementation issues such as one-time bill
impacts that result from a rate structure change.

Modification to the Existing Structure

3
Sewer Rate Structure Study

The City may choose to address rate simplicity by reducing the number of tiers, however this
would reduce equity since customers would have a limited ability to control their costs through
prudent use of water resources. Likewise, equity may be increased by increasing the number of
tiers, but simplicity would be sacrificed. Any such modification to the existing structure would not
be based on cost of service principles and would bring one-time customer rate impacts. RFC
believes that tier modifications on the existing rate structure do not merit consideration by the
City.

Flat Rate Structure


Implementation of a flat rate structure has the advantage of simplicity since every residential
customer gets the same bill. Further, this is a common structure in California since many sewer
utilities service areas cover multiple water utility service areas and jurisdictions and customer
water usage is not readily available; this is not the case with the City. Conversely, a flat rate
structure does not support resource conservation nor does it follow cost of service principles
where use of the system is related to system flow. In addition, a flat rate for residential sewer
customers would cause high one-time bill impacts for low volume users. As illustrated in Exhibit
3, the average tier 1 customer would see a 188% increase while the average tier 2 customer
would see a 55% increase in bi-monthly costs.

Exhibit 3: Flat Rate Customer Bill Impacts

Uniform Rate Structure


Implementation of a uniform rate structure more closely follows cost of service principles in that it
charges the same rate for each unit of usage. This type of structure is widely used in the U.S.
and gaining acceptance in California since it also sends a strong resource conservation message
with reduction in use resulting in a lower bill. Approximately two-thirds of existing customers
would receive a lower bill under a uniform rate structure. However, failure to control usage could
result in a much higher bill under this structure. Finally, a uniform structure may be easier for
customers to understand. The uniform rate structure is a good alternative if the City believes
metered water use is the best available approximation of sewer system use, and resource
conservation is a high priority. Representative customer impacts under a uniform rate are shown
in Exhibit 4.

Sewer Cap Modification


The City may choose to modify the existing sewer cap under the existing rate structure or under a
uniform rate structure. Since the 1997 Rate Study, the City has increased the sewer cap from 40
hcf to 51 hcf (on a bi-monthly basis). The sewer cap is intended to set a boundary above which
residential water usage is assumed to be outdoor usage. The cap concept is based on an

4
Sewer Rate Structure Study

industry-wide assumption that each person contributes approximately 75 gallons of sewer flow
per day. It is more common to have a lower sewer cap, typically around 40 hcf. Exhibit 4 shows
rate impacts under a uniform rate structure with a 40 hcf sewer cap.

5
Sewer Rate Structure Study

Exhibit 4: Uniform Rate Customer Bill Impacts

Winter Use Determination


The City may choose to modify its practice of averaging three years of winter consumption to
determine customer residential commodity charges. It seems reasonable that customer bills
should be tied to their most recent winter usage. However, outdoor winter water use can still be
significant in Southern California due to the low rainfall and moderate temperatures. Single-
family winter water use in the San Diego area can fluctuate by 20% on average, due to climate
variations. Use of a three-year average will mitigate the effects of extreme weather years and
ultimately stabilize customer rates.

CONCLUSIONS
The City Council must ultimately determine how well a rate structure meets the needs of utility
customers and the City, as a whole. However, RFC has drawn some conclusions as a result of
our analysis and industry experience, as to which options may best fit the City’s needs.

The City should consider residential rate structure alternatives if the existing structure no longer
satisfies its pricing objectives; there is no pressing need to change the rate structure. RFC
believes that the City should consider the equity advantages of a uniform rate structure with a
sewer cap reduction. Implementation of these options provides equity based on system use as
determined by metered water flow and also encourages resource conservation. RFC does not
believe the City should consider return to a flat rate. due to the disincentive for conservation, the
equity disconnect between customer bills and system usage, and the customer impacts for low
volume users. In addition, the advantage of averaging climate fluctuations and resulting

Average Tier
customer rate stability suggests that the City should continue its current practice of averaging
three years of winter usage.

Tier 1 (4 HC 6

You might also like