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March 2011

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Including Detailed Water


Rate Study

For the Years 2011


through 2015

Prepared by

Municipal & Financial Services Group

In association with


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March 28, 2011

Mr. Barry Withers, Director


City of Cleveland
Cleveland Division of Water
1201 Lakeside Avenue
Cleveland, OH 44114

Subject: Comprehensive Financial Plan – Water Rate Study Report

Dear Mr. Withers:

The MFSG project team is pleased to deliver the final report for the Comprehensive Financial
Plan and related studies for the Cleveland Division of Water (CWD). The report includes a
review of historical and projected revenue requirements, historical and projected consumption
demands, cost of service analysis, review of all ancillary fees and charges, an analysis of
alternative rate structures and an affordability assessment. In support of the report, detailed
appendices were developed including, a detailed customer and consumption analysis, results for
the water audit, system expansion opportunities study and a rate comparison study. The
Comprehensive Financial Plan provides a clear path forward for CWD to ensure the financial
health and stability of the water system.

The MFSG project team has appreciated the opportunity to work with and for the City of
Cleveland. The technical support, policy guidance and financial, operational, sales and other
information that has been provided throughout the study has allowed for its timely completion.
The participation and input provided by the CWD Staff was vitally important for the completion
of the study.

As discussed in the report, CWD has recently faced and will continue to face a number of
challenges in maintaining its strong financial position. The fact that the majority of CWD’s costs
of operating and maintaining the water system are relatively fixed presents a significant
challenge in light of the ongoing declines in water sales. CWD’s current rate structure is highly
dependent on water sales which results in a significant amount of revenue volatility. Based on
the demand forecast developed during the study, CWD will continue to experience declining
water sales moving forward. The report provides a plan to transition to a new rate structure over
time which is intended to reduce revenue volatility, provide greater rate equity and recover the
cost of providing service. In light of the challenges facing the City, the Comprehensive

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Financial Plan provides a framework for the continued financial success and viability of the
Cleveland Water Division.

The MFSG project team looks forward to the final phases of the study as the Comprehensive
Financial Plan is presented to the City Administration and Cleveland City Council for
consideration and want to thank you again for the opportunity to participate in the study.

Very truly yours,

David A. Hyder
Senior Manager

cc:
Ms. Karen Lisowski, PE
Mr. Chris Kocsan

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Comprehensive Financial Plan
Water Rate Study Report

Prepared for
Cleveland Division of Water

1201 Lakeside Avenue


Cleveland, Ohio

March 2011

Municipal & Financial Services Group


911 A Commerce Road
Annapolis, MD 21401

In association with
RNR Consulting
DLZ Inc
TABLE OF CONTENTS

1.0 EXECUTIVE SUMMARY ................................................................................................. 1-1


1.1 Overview of the Study ....................................................................................................... 1-1
1.2 Findings and Conclusions .................................................................................................. 1-2
1.3 Recommendations .............................................................................................................. 1-8

2.0 INTRODUCTION................................................................................................................ 2-1


2.1 Overview of the Cleveland Division of Water .................................................................. 2-1
2.2 Key Issues, Goals and Objectives ...................................................................................... 2-2
2.3 Study Scope of Work and Approach ................................................................................. 2-3
2.4 Organization of Report ...................................................................................................... 2-6

3.0 REVENUE REQUIREMENTS .......................................................................................... 3-1


3.1 Operating and Maintenance Costs ..................................................................................... 3-1
3.2 Capital Improvement Program ........................................................................................... 3-7
3.3 Cash Funded Capital Projects ............................................................................................ 3-9
3.4 Existing Debt ..................................................................................................................... 3-9
3.5 Projected Future Debt ...................................................................................................... 3-11
3.6 Reserves ........................................................................................................................... 3-12
3.7 Revenue Requirements .................................................................................................... 3-14

4.0 CUSTOMER/CONSUMPTION ANALYSIS.................................................................... 4-1


4.1 Customer Account and Consumption History ................................................................... 4-1
4.2 Residential Customer Usage Patterns ................................................................................ 4-5
4.3 Commercial Customer Usage Patterns .............................................................................. 4-9
4.4 Conclusions ...................................................................................................................... 4-10

5.0 WATER DEMAND FORECAST ....................................................................................... 5-1


5.1 Summary ............................................................................................................................ 5-1
5.2 Declining Water Consumption .......................................................................................... 5-1
5.3 Residential Water Demand Projections Methodology....................................................... 5-7
5.4 Residential Customer and Water Demand Forecasts ....................................................... 5-12
5.5 Commercial Customer and Water Demand Forecasts ..................................................... 5-18
5.6 Master Meter Water Demand Forecasts .......................................................................... 5-20
5.7 Conclusion ....................................................................................................................... 5-21

6.0 CURRENT AND FUTURE REVENUES WITH EXISTING RATES........................... 6-1


6.1 Approach ............................................................................................................................ 6-1
6.2 Historical and Existing Rates ............................................................................................. 6-1
6.3 Economic Analysis of Recent Revenues ........................................................................... 6-2
6.4 Future Revenue Assumptions and Evaluation Metrics ...................................................... 6-8
6.5 Results of Operations ......................................................................................................... 6-9
6.6 Summary .......................................................................................................................... 6-13

7.0 MISCELLANEOUS REVENUE ........................................................................................ 7-1


7.1 Private Fire Protection Service .......................................................................................... 7-1
7.2 Ancillary Fees and Charges ............................................................................................... 7-3
7.3 Non-Rate Miscellaneous Revenue ..................................................................................... 7-8
7.4 Summary ............................................................................................................................ 7-9

8.0 COST OF SERVICE ANALYSIS ...................................................................................... 8-1


8.1 Approach ............................................................................................................................ 8-1
8.2 Cost of Service Analysis .................................................................................................... 8-3
8.3 Cost of Service Ownership Surcharge ............................................................................... 8-8
8.4 Master Meter Cost of Service .......................................................................................... 8-10
8.5 Conclusion ....................................................................................................................... 8-11

9.0 RATE STRUCTURE ALTERNATIVES .......................................................................... 9-1


9.1 Pricing Objectives .............................................................................................................. 9-1
9.2 Current Rate Structure Observations ................................................................................. 9-3
9.3 Global Assumptions for All Rate Alternatives .................................................................. 9-5
9.4 Alternative Rate Structures ................................................................................................ 9-6
9.5 Recommended Rate Alternative (#4)............................................................................... 9-15
9.6 Customer Bill Comparisons ............................................................................................. 9-20
9.7 Summary .......................................................................................................................... 9-23

10.0 AFFORDABILITY PROGRAM .................................................................................... 10-1


10.1 Overview ........................................................................................................................ 10-1
10.2 The Need for Assistance ................................................................................................ 10-2
10.3 Affordability Standards .................................................................................................. 10-3
10.4 Existing Assistance Programs ........................................................................................ 10-5
10.5 Rate Structure................................................................................................................. 10-6
10.6 Benefits Provided ........................................................................................................... 10-7
10.7 Effectiveness of the Current Assistance Programs ........................................................ 10-8
10.8 Barriers to Assistance Programs .................................................................................... 10-9
10.10 Affordability Program Features and Options ............................................................. 10-10
10.11 Recommendations for Enhancements ........................................................................ 10-12
10.12 Additional Information ............................................................................................. 10-19
10.13 Conclusions ................................................................................................................ 10-20

11.0 CONCLUSION ................................................................................................................ 11-1


11.1 Findings.......................................................................................................................... 11-1
11.2 Recommendations .......................................................................................................... 11-3
APPENDICES

Appendix A - Ancillary Fee Calculations

Appendix B - Cost of Service Detailed Allocations

Appendix C - Rate Comparison Study

Appendix D - Rate Alternative Pro-Formas

Appendix E - Alternative Rate Tables and Bill Comparisons

Appendix F - Comprehensive Financial Plan Workshop Materials

Appendix G - Task Report: Unmetered Water Audit

Appendix H - Task Report: System Expansion Opportunities Study


1.0 EXECUTIVE SUMMARY

1.1 Overview of the Study


The Cleveland Division of Water (CWD) operates as a major regional water utility, providing
retail water service to approximately 410,000 retail accounts within the City of Cleveland and 65
suburban communities (referred to as Direct Service Suburbs). CWD also provides water on a
wholesale basis to five suburban communities and provides emergency standby connections to
several suburban communities.

The Cleveland Division of Water operates as an Enterprise Fund within the City of Cleveland’s
Department of Public Utilities. As an Enterprise Fund, CWD does not have access to tax
revenues to support its operations. CWD is solely dependent on user charges and fees to fund its
operation, maintenance and long-term obligations related to the water system. CWD operates in
a challenging environment facing numerous issues such as rising operating and maintenance
expenses, declining per capita and aggregate water consumption, continued support of a multi-
year capital improvements program, current and future debt levels and aging infrastructure.

A Comprehensive Financial Plan was developed and completed during 2005 for the period of
2006 through 2011. The financial plan included the development of rates, fees and charges. The
plan was partially adopted by the City in the spring of 2006. The City did not adopt the fifth
year of recommended rate increases (2011) and the recommended customer service charge was
decreased and held constant. The partial adoption and modifications to the customer service
charge has resulted in approximately $22 million in reduced revenues over the last five years
compared to the recommended plan.

In light of these issues and challenges, the Municipal and Financial Services Group (MFSG) was
engaged to assist CWD with the development a Comprehensive Financial Plan for the years 2011
through 2015 (the study period).

The Comprehensive Financial Plan consists of several related tasks which include the following:

• Task A - Comprehensive Water Rate Study


• Task B - Cost of Service Analysis
• Task C - System Expansion Study
• Task D - Unmetered Water Audit
• Task E - Comprehensive Financial Plan Report

The tasks are designed to facilitate the development a Comprehensive Financial Plan that will
ensure the continued financial health and viability of CWD and provide a financial roadmap for
the next five years.

MFSG 1-1 Cleveland Division of Water


1.2 Findings and Conclusions
The following section presents a summary of the key findings and conclusions developed during
the completion of the Comprehensive Financial Plan.

1.2.1 Revenue Requirements

The system revenue requirements constitute the total cost incurred by CWD while operating and
maintaining the system. Revenue requirements include operating and maintenance expenses,
existing debt service, capital improvement projects (funded with cash or future debt) and
contributions to reserves. Exhibit 1.1 shows graphically the historical and projected revenue
requirements for the study period.

Exhibit 1.1 - Historical and Projected Revenue Requirements ($1,000s)


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As shown in Exhibit 1.1, revenue requirements have steadily increased over the last five years
and are projected to continue to increase over the study period. The projected increases in
revenue requirements are a result of increases in all categories of expenses as well as the result of
the issuance of new debt. CWD continues to pursue opportunities for cost savings through
operating efficiency. These efficiencies are reflected in the revenue requirements. However,
even with cost containment, the fact is that a significant portion of the cost of operating and
maintaining the system are outside the control of CWD. Approximately 80% of the costs of
operating the system are fixed and annual revenue requirements will total approximately
$1.3 billion over the study period. The average annual increase in revenue requirements is
3.3%. The cumulative increase in revenue requirements over the study period is approximately
16.5%.

1.2.2 Customer Account and Water Demand Forecast

The majority of CWD revenues (approximately 90% of total revenues) are generated from the
sale of water. A review of the trends in the number of customer accounts and water consumption
over the past five years reveals a continued decline in the number of customer accounts and
water consumption. Billed water consumption has fallen by almost 20% over the past six years.

MFSG 1-2 Cleveland Division of Water


One of the reasons for the decline in water consumption appears to be the reduction in water
usage per account. The average usage per customer account has declined over the last six years
and a detailed review of usage per account demonstrates that a significant number of customers
use a minimal amount of water per quarter. Additionally over the last two years (2009 and 2010)
the economic recession has caused a significant reduction in water usage above and beyond the
levels that could have realistically been predicted.

Given the historical reduction in customers and water consumption, an accurate water demand
forecast is a critical component of the financial plan. To develop the forecast, a detailed analysis
was completed by projecting water demand at the census tract level for the Cleveland region for
residential customers. The demand forecast considered a number of factors influencing water
demand including demographic factors (particularly changes in household size), economic
factors, price elasticity and penetration of low-flow appliances and plumbing fixtures. The
demand forecast demonstrates a continued decline in customer accounts and water consumption.
The forecast is shown in Table 1.1.

Table 1.1 - Total System Customer Account and Water Demand Forecast
Cumulative
(MCFs) 2011 2012 2013 2014 2015
Change
Accounts
Number of Accounts 414,733 414,061 413,378 412,689 411,989 (2,744)
Change in Total
-0.16% -0.16% -0.16% -0.17% -0.17% -0.66%
Accounts
Water Demand (MCFs)
Billable Quantities 6,052,225 5,822,340 5,673,853 5,532,355 5,396,656 (655,569)
Change in Total
-2.52% -3.80% -2.55% -2.49% -2.45% -13.81%
Demand

The projected continued decline in water consumption over the study period will need to be
addressed in the financial plan as the billable quantities of water, which serve as the majority of
the basis for CWD revenues, will produce reduced revenues. In fact, even without increases in
expenses, CWD would have to increase rates at a level of about 3% per year to just keep
revenues at the current levels. Section 5 of the report outlines the full customer and water
demand forecast.

1.2.3 Revenue Projections with Existing Rates

To assess the sufficiency of the current water rates, revenues generated with the current rates
using the demand forecast mentioned above are compared with the revenue requirements over
the study period. The annual cash shortfall, along with specific financial metrics is used to
evaluate the adequacy of the current rates. Exhibit 1.3 shows the annual revenue requirements
compared with the revenues generated with current (2010) water rates. It should be noted that
water rates have not been increased so far during 2011 and therefore currently remain at 2010
rates.

MFSG 1-3 Cleveland Division of Water


Exhibit 1.2 - Net Revenue Requirements and Revenues with Existing (2010) Rates ($1,000s)

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Exhibit 1.2 demonstrates that current water rates will not generate sufficient revenue to fund the
revenue requirements over the study period. The annual shortfalls in revenues would jeopardize
the financial health and viability of CWD. In particular, CWD will not be able to meet its debt
service coverage requirements starting in 2011 and will exhaust its cash reserves over the study
period. Over the five year period the cumulative shortfall in revenues would be approximately
$230 million. Exhibit 1.3 shows CWD’s cash balances over the study period under existing
rates.

MFSG 1-4 Cleveland Division of Water


Exhibit 1.3 - CWD Projected Cash Position with Existing Rates ($1,000s)
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 
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As demonstrated in Exhibit 1.3, by 2015, CWD will have exhausted all of its cash and will be
insolvent. Operating in this manner would eliminate CWD’s access to capital for system
repairs/upgrade, resulting in an inability to maintain the water system. It would significantly
disrupt CWD’s cash flow, resulting in an inability to fund operating expenses (CWD would not
be able to purchase material goods necessary for operation) and would ultimately lead to
bankruptcy of the CWD system.

Given the forecast under existing rates, it is clear that CWD’s cost of providing water service to
its customers over the next five years will exceed revenues generated by existing rates and fees.
Expenditures will outpace revenues by about 32% cumulatively over the study period. The
results of the shortfalls in revenues will greatly jeopardize the financial viability of CWD.
Existing cash balances will be exhausted and the Rate Covenants on existing debt will not be
met, resulting in default. As a result, CWD is faced with either significantly cutting operating
and capital expenditures and not continuing capital improvements or increasing water rates and
fees. However, since the majority of CWD’s operating and maintenance costs are fixed and
the capital projects included in the capital improvements program are all necessary to
ensure that the system remains operable, CWD realistically must increase its rates and fees
while continually looking for opportunities for efficiencies in operation to reduce
expenditures. Section 6 of the report provides additional details regarding the sufficiency of
existing water rates and fees.

MFSG 1-5 Cleveland Division of Water


1.2.4 Miscellaneous Revenues

Miscellaneous (or non-rate) revenues are revenues derived from sources other than water rates.
Sources of miscellaneous revenues include interest income, private fire protection service, and
ancillary fees. Non-rate revenues help offset the gross revenue requirements and reduce the
revenue required from metered water sales. As part of the Comprehensive Financial Plan, a cost
of service analysis was completed to determine the appropriate level for all ancillary fees and
private fire protection service. The analysis reveals that the current level of ancillary fees and
private fire protection charges will not support the cost of providing these services over the study
period due to the increasing cost of providing these services. The calculated costs and the
proposed fees and charges are presented in Section 7 of this report.

1.2.5 Cost of Service

A cost of service study was completed to determine the allocation of costs to CWD customers
based on the demand and service characteristics of each district customer. The analysis was
completed for both retail customers and wholesale (master meter community) customers. The
cost of service is reflected in rate differentials between the four rate districts currently served by
CWD and the differential for master meter communities. The results of the cost of service
analysis for the four rate districts are shown in Table 1.2.

Table 1.2 - Cost of Service Rate District Differentials


Cleveland Low / 1st High 2nd High 3rd High
Current Rate District Differentials 1.00 1.55 1.80 2.06
Calculated Rate District Differentials 1.00 1.30 1.60 1.85

Table 1.2 demonstrates that the current rate differentials do not reflect the cost of service based
on our analysis. The analysis reveals that the primary reason for the changes in differentials is
due to declining demand in the City and necessary capital investments in buried infrastructure
required despite the decline in demand.

A second objective of the cost of service analysis was to evaluate the cost of service for master
meter communities. The current master meter service agreements state that master meter
communities annual rate increases will be, at maximum, 75% of the increase charged to retail
customers in the service district serving the master meter community. Based on the cost of
service analysis, we have determined that this value should now be 70%. The detailed cost of
service analysis is presented in Section 8 of the report.

1.2.6 Rate Alternatives

MFSG completed an assessment of the current CWD water rate structure, in light of CWD goals
and objectives for pricing the service, and developed several rate structure alternatives that were
considered during the course of the study. The rate structure utilized by CWD has taken shape

MFSG 1-6 Cleveland Division of Water


over a number of years. Based on our review of the current structure, two key conclusions can
be made regarding the current rate structure.

• The fixed portion of revenues generated by the current rate structure as a


percentage of total revenues is extremely low at approximately 4%. As a result,
CWD revenues are highly dependent on water consumption which continues to decline
and are subject to a high level of volatility.

• The consumption charges within the existing water rate structure do not provide an
appropriate level of rate equity among users of the system. Table 1.3 presents the
current consumption rates compared with the cost of providing water which demonstrates
the lack of rate equity. Specifically, the current structure:

o Provides a “lifeline” quantity of water that represents half of the average


customers usage, which far exceeds a true lifeline quantity;
o Does not match the cost of service differentials;
o Includes an inclining block structure with a significant differential between the 1st
MCF and additional MCF’s that causes volatility in revenues with changing water
demand and discourages water consumption; and
o Includes consumption rates for the 1st MCF and Homestead that are set at levels
well below the cost of providing water service.

Table 1.3 - Cost of Service per MCF Compared to Current Consumption Rates
Low / 1st
Cleveland 2nd High 3rd High
High
Current Consumption Rates (per MCF)
1st MCF $12.58 $19.50 $22.64 $25.91
Additional MCF’s $26.90 $41.70 $48.42 $55.41
Homestead $5.59 $8.66 $10.06 $11.52
Cost of Service per MCF $22.64 $35.10 $40.76 $46.65

Based on our review of the current rate schedule, CWD has an opportunity to modify the current
rate structure to more appropriately match its objectives and address changes in the operational
characteristics of the Cleveland Water System. Our recommended alternative rate structure is
discussed later in this section and in further detail in Chapter 9 of this report.

1.2.7 Affordability

As part of the Comprehensive Financial Plan, the project team completed a review and
assessment of the current affordability programs offered by CWD to its customers. CWD
currently offers two assistance programs for residential customers. These programs include:

• A Homestead discount which provides volumetric discounted rates with eligibility based
on age and income or to those that are disabled.

MFSG 1-7 Cleveland Division of Water


• An Affordability Program which provides a 20% discount on the entire bill with
eligibility based on household size and income.

The two programs have different levels of effectiveness as measured by participation. The
Homestead program appears to be rather effective as it has a participation of approximately
21,000 households, which is estimated to be a participation rate of between 30% and 50% of
eligible households. The Affordability Program does not experience the same level of
participation as only about 2,100 households participate. There is little information to assess
why this participation rate is so low. One possibility is that the discount is insufficient to attract
applicants. Another possibility is that customers are not aware of this relatively new program,
which began in 2007. Additionally, to qualify for the discount programs, the customer must be
the owner of the property which as a result disqualifies renters. Regardless of the reason, it is
apparent that this program requires some modification in order to achieve the results that were
intended and that could be anticipated from a discount program for water service in a large
metropolitan area.

1.3 Recommendations

The following section presents a summary of the recommendations developed during the
development of the Comprehensive Financial Plan.

• We recommend that CWD increase water rates and fees over the next five years to fund
the ongoing operations of the system. The increases are necessary to ensure the ongoing
operation of the system and specifically to meet coverage requirements on debt service
obligations and to maintain cash reserves.

• We recommend that CWD implement increases to its ancillary fees and charges as
presented in Chapter 7 of this report.

• We recommend that CWD adopt an alternative rate structure, as shown in Table 1.4 that
will result in a phase-in of the following modifications over the study period.

o Increase the fixed customer service charge effective July 1, 2011 and call it the
“base fixed cost recovery charge.”
o Impose the fixed charge based on meter size.
o On January 1, 2012, reduce the “lifeline” quantity of water discount from 1 MCF
to 0.6 MCF (1st unit of water).
o On January 1, 2012, reduce the rate differential between the “lifeline” quantity of
water (1st block) and additional MCFs from 114% to 50% over time.
o On January 1, 2012, reduce the Homestead discount from 56% to 35%.
o Beginning on January 1, 2012, implement the calculated cost of service
differential for direct service suburbs and phase in over time.
o Implement the calculated cost of service differential for master meter
communities.

MFSG 1-8 Cleveland Division of Water


Table 1.4 - Recommended Quarterly Rates (2011 – 2015)
Rate District 2011 2012 2013 2014 2015
All Customers Meter Size
Base Fixed Cost
5/8”, 3/4”, 1” $18.00 $18.00 $21.00 $24.00 $27.00
Recovery Charge*
1 ½”, 2” $36.00 $36.00 $41.00 $47.00 $53.00
3”, 4” $120.00 $120.00 $140.00 $160.00 $180.00
6” $220.00 $220.00 $250.00 $290.00 $320.00
8” $330.00 $330.00 $380.00 $430.00 $480.00
10” $410.00 $410.00 $480.00 $540.00 $610.00
12” $500.00 $500.00 $570.00 $650.00 $730.00
*Fixed charge for compound meter based on larger size
Cleveland Rates shown in $ per MCF
Regular 0 - 0.6 MCF(1) $12.58 $13.76 $15.51 $17.34 $19.26
Additional MCFs $26.90 $27.52 $29.48 $31.22 $32.74
Homestead All MCF's $5.59 $6.88 $8.53 $10.41 $12.52

Direct Service Suburbs


Low / 1st High
Regular 0 - 0.6 MCF(1) $19.50 $20.47 $22.11 $23.63 $25.04
Additional MCFs $41.70 $41.70 $42.01 $42.53 $42.56
Homestead All MCF's $8.67 $10.23 $12.16 $14.18 $16.27

2nd High
Regular 0 - 0.6 MCF(1) $22.64 $24.08 $26.38 $28.62 $30.82
Additional MCFs $48.42 $48.42 $50.11 $51.51 $52.39
Homestead All MCF's $10.06 $12.04 $14.51 $17.17 $20.03

3rd High
Regular 0 - 0.6 MCF(1) $25.91 $27.62 $30.33 $33.00 $35.63
Additional MCFs $55.41 $55.41 $57.63 $59.39 $60.57
Homestead All MCFs $11.52 $13.81 $16.68 $19.80 $23.16

Master Meter Communities (Monthly Rates)


Bedford All MCFs $31.54 $31.54 $31.54 $32.53 $33.35
Chagrin Falls All MCFs $35.76 $35.76 $36.14 $37.51 $38.56
Cleveland Heights All MCFs $31.50 $31.50 $31.50 $32.53 $33.35

MFSG 1-9 Cleveland Division of Water


Rate District 2011 2012 2013 2014 2015
Lakewood All MCFs $27.10 $27.10 $27.10 $27.10 $27.10
Geauga County All MCFs $38.72 $38.72 $38.72 $38.72 $38.72
Emergency Standby Suburbs
Berea All MCFs $39.44 $39.44 $39.44 $39.44 $39.44
Lake County All MCFs $38.36 $38.36 $38.36 $38.36 $38.36
Lorain County All MCFs $39.44 $39.44 $39.44 $39.44 $39.44
North Ridgeville All MCFs $31.41 $31.41 $31.41 $31.41 $31.41
Medina County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Summit County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Hudson All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Portage County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
(1)
Usage block change in 1st MCF reduced to 0.6 MCF begins on January 1, 2012.

Table 1.5 presents the comparison of quarterly bills under the recommended rates for typical
residential customers within the City of Cleveland and direct service suburbs with a 5/8” meter
using 2 MCF and commercial customers with a 2” meter using 25 MCF.

Table 1.5 - Sample Residential and Commercial Quarterly Bills with Recommended Rates
Residential Commercial
Quarterly Bill (1)
(1) (2)
2011 2011 2012 2013 2011 2011(2) 2012 2013
City of Cleveland $47 $57 $65 $72 $665 $694 $716 $770
st
Low/1 High $68 $79 $89 $93 $1,027 $1,056 $1,066 $1,079
nd
2 High $78 $89 $100 $107 $1,192 $1,221 $1,232 $1,280
rd
3 High $88 $99 $112 $120 $1,363 $1,392 $1,405 $1,465
(1)
Represents current bill
(2)
Assuming July 1, 2011 adoption of proposed rates

• We recommend that CWD consider the following items to enhance the current assistance
programs.

o CWD should establish clear goals for its affordability assistance programs.
o The Affordability Program discount should be increased from the current 20%
percent level to 40%.
o CWD should develop a marketing plan to promote its Homestead and
Affordability Programs.
o CWD should consider offering longer term payment plans without interest
charges for customers who may be unable to pay their bills.
o CWD should consider offering budget billing.
o CWD should consider moving to monthly billing, especially with the impending
implementation of an AMR system.

MFSG 1-10 Cleveland Division of Water


o CWD should consider offering crisis vouchers to customers who have a
temporary or one-time financial problem with bill payment.

• The financial health and viability of CWD will significantly deteriorate with the
continued utilization of the current schedule of rates and fees. We recommend that CWD
implement the proposed increases to water rates and fees expeditiously given the dire
financial consequences that will result should increases be delayed or not adopted.

MFSG 1-11 Cleveland Division of Water


2.0 INTRODUCTION

2.1 Overview of the Cleveland Division of Water


The Cleveland Division of Water (CWD) was established in 1853 and is one of the largest
waterworks systems in the United States. CWD began operation in 1856 when the system was
completed at an original cost of $500,000, supplying the City of Cleveland with water from Lake
Erie at a rate of 0.04 million gallons per day (mgd). The water system has functioned
continuously for more than 150 years and is responsible for collecting, treating, pumping and
delivering potable water throughout its service area which encompasses more than 640 square
miles.

The water system is comprised of four treatment plants, five major pumping stations, eleven
secondary pumping stations, twenty-six storage facilities and more than 5,000 miles of water
mains. CWD draws water from four intake tunnels located in Lake Erie. The distribution
system includes approximately 70,000 fire hydrants and 115,000 main line valves.

CWD operates a major regional water utility, providing retail water service to approximately
415,000 retail accounts within the City of Cleveland and 65 suburban communities (referred to
as Direct Service Suburbs). CWD also provides water on a wholesale basis to five other
suburban communities and provides emergency standby connections to an additional eight
suburban communities. The Direct Service Suburbs are located in Cuyahoga County, and
portions of Medina, Geauga and Summit Counties.

The area served by CWD is divided into four operational service districts that are based on
terrain and ground elevation. The service districts, which correspond to rate districts for billing,
include Low, First High, Second High and Third High. The word “High” refers to elevation and
the need to pump water to a range of heights above Lake Erie. The customer accounts located
within the City are designated appropriately as City of Cleveland accounts and are billed
according to this designation. The City of Cleveland represents approximately 31% of the total
retail accounts and about 32% of the total water consumption. Direct service suburbs (i.e.,
“retail” suburban customers) represent approximately 69% of the total retail accounts and 58%
of the total water consumption. Master meter (“wholesale”) accounts represent approximately
10% of the total water consumption.

The Cleveland Division of Water operates as an Enterprise Fund within the City of Cleveland’s
Department of Public Utilities. As part of the CWD’s strategic planning processes, a
Comprehensive Financial Plan was developed and completed during 2005 for the period of 2006
through 2011. The financial plan included the development of rates, fees and charges. The plan
was partially adopted by the City in the spring of 2006. The City did not adopt the fifth year of
recommended rate increases (2011) and the recommended customer service charge was
decreased and held constant. To ensure the continued financial health and viability of CWD, the
Municipal and Financial Services Group (MFSG) was engaged to assist CWD with the
development a Comprehensive Financial Plan for the years 2011 through 2015 (the study
period).

MFSG 2-1 Cleveland Division of Water


2.2 Key Issues, Goals and Objectives
The Cleveland Division of Water (CWD) provides the Northeast Ohio region with a vital
resource necessary for life and commerce. The efficient and reliable delivery of clean, safe
drinking water to residents and businesses within the region is essential for public health and for
economic development within the area. Since the early 1980’s CWD has invested approximately
$1.6 billion in its water system to ensure the continued delivery of this vital resource to the area.
To ensure the continued success of the region and to protect the significant investments that have
been made, the continued financial health and stewardship of the water system must be
considered to be of upmost importance to the entire region.

As an enterprise fund, CWD does not rely on tax revenues to support its operations. CWD is
solely dependent on user charges and fees to fund its operations, maintenance and long-term
obligations related to the water system. Similar to most municipal water utilities around the
country, CWD operates in an environment that presents continual challenges. The key issues
currently facing CWD include:

• Rising operating and maintenance expenses


• Declining per capita and aggregate water consumption
• Continued support of a multi-year capital improvements program
• Current and future debt levels
• Rate equity
• Aging infrastructure
• Economic impact of rates
• Impact of rates on low income households

The key issues listed present real challenges to CWD due primarily to the fact that the costs of
operating and maintaining the water system are largely fixed and outside the control of CWD.
Inflationary increases escalate operating expenses, regulatory requirements dictate a number of
capital investments, aging infrastructure must be repaired and/or replaced to ensure continued
operations and long-term liabilities must be repaid. To further magnify the challenges, CWD has
experienced a continuing decline in the sale of water which serves as the base from which
revenues are recovered. The decline in water sales alone – with no increases in expenditures
– would require significant annual rate increases.

The identification of the key issues allows for the development of specific goals and objectives
for the Comprehensive Financial Plan. The overall goal for the Comprehensive Plan is very
simple and straightforward:

Development of a plan of action that will ensure the continued financial health and
stability of the Cleveland Water Division while providing effective stewardship for
the system.

Several key objectives for the plan assist in the furtherance of the primary goal and are primarily
accomplished through the implementation of water user charges and fees. The objectives for
water user charges and fees include the following;

MFSG 2-2 Cleveland Division of Water


• Full cost recovery - Water user charges and fees should be set at a level that fully
recovers the cost of providing water service.

• Equitable allocation of expenses - Water user charges and fees should be developed to
equitably allocate costs among users of the water system based on the costs incurred by
CWD while serving each customer class.

• Revenue stability - Water user charges and fees should be developed to provide an
increase in revenue stability in light of declining consumption levels.

• Economic development - Water user charges should be developed to foster economic


development and enhance retention of commercial customers.

• Affordability - A system of water user charges and fees should be developed to not only
cover revenue needs, but to do so while providing assistance to low income households
who otherwise would be unable to afford and pay for these vital water services.

The specific objectives mentioned herein are referenced throughout this report to demonstrate
how each is addressed in the Comprehensive Financial Plan.

2.3 Study Scope of Work and Approach


To meet the stated goals and objectives, CWD identified a comprehensive set of tasks/studies
that constitute the Comprehensive Financial Plan. The tasks identified by CWD represent the
scope of work for the study. The tasks include the following:

Task A - Comprehensive Water Rate Study

• Identify the cost of operating and maintaining the water system (revenue requirements)
over the study period.

• Develop a demand model to forecast customer accounts and water consumption over the
study period.

• Review the adequacy of existing rates, fees and charges to fund system revenue
requirements over the study period.

• Develop a financial plan to ensure adequate revenues over the study period. This
includes the review, assessment and development of alternative rate structures, including
a five-year pro-forma for the recommended rates with demonstrated operating results.

• Assess the current affordability programs and make recommendations for modification
and enhancements.

• Develop a comprehensive rate model to facilitate the comprehensive financial plan.

MFSG 2-3 Cleveland Division of Water


Task B - Cost of Service Analysis

• Determine the cost of providing service to CWD retail and master meter customers based
on geographic locations and cost of ownership.

Task C - System Expansion Study

• Develop a plan to possibly expand the water system’s service area and unit sales to
customers currently not served by CWD.

• Develop a plan to ensure the retention of existing water customers and an increase in the
quantity of water sold to existing customers.

Task D - Unmetered Water Audit

• Complete a water audit study to identify the extent of foregone revenue due to water loss
(whether physical loss of the water or a lack of billing for certain quantities of water) and
compare these results with typical industry patterns and provide recommendations based
on the findings.

Task E - Comprehensive Financial Plan Report

• Develop a comprehensive financial plan report presenting the methodology, analysis,


results and recommendations developed in the completion of the Comprehensive
Financial Plan.

The majority of the tasks identified in the scope of work are interrelated and dependent on each
other. For this reason a number of the tasks were completed in parallel with one another.
Exhibit 2.1 presents the overall flow of activities for the study. The scope of services is broken
down into four key steps. The exhibit excludes Tasks C and D which do not directly impact the
financial forecast portion of the overall plan. In other words, for purposes of developing a
conservative financial forecast, increased water sales due to expansion of the CWD service area
and/or elimination of unmetered and unbilled water are not guaranteed and therefore are not
factored into the financial plan. The expansion of the water system and identification of
unmetered water losses are of significant importance to the overall financial health and
operational efficiency of the CWD system. However these are longer term efforts that may or
may not bear results during the study period or in the near future.

MFSG 2-4 Cleveland Division of Water


Exhibit 2.1 - Comprehensive Financial Plan Overview

Fire Protection
Operations and Charges
Maintenance Budget
Miscellaneous
Revenues
Operating Reserve Ancillary Fees/Charges

Affordability
Programs
Capital Budget

Capital Improvement
Program Financial Plan
Gross Revenue Net
Revenue 5-Year Pro-forma Recommended
Capital Reserve Requirements
Requirements Rates and Fees

Future
Debt Service
Cost of Service Model
Currently Outstanding
Debt Service

Debt Service Reserve

Water Demand Model

Step 1 - Revenue Requirements


Step 2 - Demand Model
Step 3 - Cost of Service
Step 4 - Rate Design

MFSG 2-5 Cleveland Division of Water


2.4 Organization of Report
The Comprehensive Financial Plan is encompassed in this report. The report is organized into
the following chapters:

Chapter 1 - Executive Summary - This chapter of the report provides a high level summary of
the study. It presents a study overview, key findings and conclusions and specific
recommendations.

Chapter 2 - Introduction - This chapter of the report provides an overview of the CWD, the
comprehensive financial plan scope of work and the project team study approach.

Chapter 3 - Revenue Requirements - This chapter of the report provides the total estimated
cost of operating and maintaining the CWD water system over the study period. The section
outlines operating and maintenance expenses, existing and future debt service, cash funded
capital projects and reserves.

Chapter 4 - Account / Consumption Analysis - This chapter of the report presents an analysis
of historical customer accounts, water consumption and customer usage patterns.

Chapter 5 - Water Demand Forecast - This chapter provides a detailed customer and
consumption demand forecast for the study period.

Chapter 6 - Current and Future Revenues with Existing Rates - This chapter of the report
provides an economic analysis of the CWD water sales revenues over the last two years and the
anticipated financial results that would occur over the planning period with existing rates and
fees. This section examines CWD’s ability to meet key financial metrics under existing rates and
identifies any shortfalls.

Chapter 7 - Miscellaneous Revenues - This chapter of the report presents the recommendations
for the various ancillary fees and charges imposed by CWD and a projection of the total
anticipated revenues derived from these fees and charges.

Chapter 8 - Cost of Service Analysis - The purpose of this chapter of the report is to present the
results of the cost of service analysis and basis for rate and fee differentials for various customer
classes during the study period.

Chapter 9 - Rate Structure Alternatives - The purpose of this chapter of the report is to
present observations regarding CWD’s current rate structure, alternative rate designs considered
during the study and a recommended rate structure. The section also presents customer bill
impacts under the various rate designs considered during the study.

Chapter 10 - Affordability Assessment - This chapter of the report provides the results of an
assessment of CWD’s current affordability programs. The section evaluates the effectiveness of
the current programs and makes short-term and long-term recommendations for improvements
and enhancements to the programs.

MFSG 2-6 Cleveland Division of Water


Chapter 11 - Conclusions and Recommendations - This chapter of the report provides a
comprehensive summation of the project team’s conclusions and recommendations for
implementation of the Comprehensive Financial Plan by CWD management.

The report is accompanied by the several appendices which provide additional information and
analysis in support of the Comprehensive Financial Plan. The appendices provide detailed
calculations, materials developed to facilitate workshops and several task reports providing the
results of Task C (System Expansion Study) and Task D (Unmetered Water Audit).

Appendix A - Ancillary Fee Calculations

Appendix B - Cost of Service Detailed Allocations

Appendix C - Rate Comparison Study

Appendix D - Rate Alternative Pro-Formas

Appendix E - Alternative Rate Tables and Bill Comparisons

Appendix F - Comprehensive Financial Plan Workshop Materials

Appendix G - Task Report: Unmetered Water Audit

Appendix H - Task Report: System Expansion Opportunities Study

MFSG 2-7 Cleveland Division of Water


3.0 REVENUE REQUIREMENTS

This chapter of the report outlines historical and future cost of operating and maintaining the
CWD system, which constitute the system revenue
requirements. Our approach included a detailed review
of each of the costs incurred by the CWD to ensure that
the full cost of providing water service was identified.
The revenue requirements can be broken down into four
main categories of costs including: operating and
maintenance (O&M) expenditures, the Capital
Improvements Program (CIP), existing debt service and
any contributions to reserves. The funding of the future
CIP is reflected in the revenue requirements as future
debt service (bonds and/or loans) and cash funded
capital projects. The estimates of future revenue
requirements are of vital importance to the development
of the five-year rate program as the revenue
requirements provide the basis for setting future rates. Understating future revenue requirements
could potentially result in future expenditures exceeding future revenues which would impact the
financial health of CWD. Therefore significant analysis was completed in forecasting each of
the components of the revenue requirements in an attempt to develop accurate estimates of future
expenditures.

The following section of the report describes each of the categories of expenses incurred by
CWD as it provides water service. The costs are all based on official documents and data
provided by the CWD. All assumptions used to forecast each expenditure category are
documented in each section.

3.1 Operating and Maintenance Costs


The day-to-day operating and maintenance (O&M) expenses include expenditures required to
operate and maintain the CWD system. The O&M expenses by function, categorized by CWD
Sections, include customer account services, plant operations, distribution and maintenance,
engineering, information technology, budget and finance, administration and water management.
Each of the sections function together to provide comprehensive services related to providing
water to the CWD service area. The primary responsibility for each section and the overall
percentage of the O&M expense are shown in Table 3.1 and Exhibit 3.1.

MFSG 3-1 Cleveland Division of Water


Table 3.1 - CWD O&M Section Responsibilities
CWD Section Responsibility

Customer Account Services Meter reading, billing, collections and customers service

Pumping and purifying all water sold to customers. Operation of


Plant Operations
laboratories for sampling raw and potable water.

Operating budget, legislation processing, contract procurement, requisition


Budget and Finance
processing and capital financing.

Information technology systems including network administration, billing


Information Technology
system, work order management and telecommunications.
Services and maintains distribution system including water mains, meters,
Distribution and Maintenance
valves and fire hydrants.
Human resources, public relations, training and general CWD
Administration / Water Management
administration and oversight.

Design and construction of all capital improvement projects plus program


Engineering
management.

Exhibit 3.1 - Percentage of Total O&M by CWD Section


  
 







 



To develop forecasts for operating expenses, MFSG reviewed actual operating expenses
expe for the
period 2006 to 2009 and the estimated actual expenditures for 2010
2010. At the time of completion

MFSG 3-2 Cleveland Division of Water


of this report, CWD was able to provide 11 months of actual expenditures for calendar year
2010. The 12th month was estimated based on the expenditures for the previous 11 months.
Table 3.2 presents the O&M expenses for this period by CWD section and Exhibit 3.2 presents
the same information graphically.

Table 3.2 - Historical O&M Expenses by CWD Section Category


2010
($1,000s) 2006 2007 2008 2009
(estimate)
Customer Account Services $11,332 $10,961 $11,649 $10,109 $10,617
Plant Operations 43,087 42,810 43,104 43,155 39,541
Budget and Finance 6,049 12,392 12,831 12,553 10,424
Information Technology 2,565 2,709 2,397 2,520 2,330
Distribution and Maintenance 33,975 35,750 35,580 35,343 34,149
Administration / Water Management 22,361 22,046 22,200 26,100 25,910
Engineering 13,510 13,542 16,073 14,300 13,853
Total Water O&M Expenses $132,879 $140,210 $143,833 $144,081 $136,824
Annual Percentage Change 5.5% 2.6% 0.2% -5.0%

Exhibit 3.2 - Historical O&M Expenses by Section ($1,000s)










    
 
 
 
 

MFSG 3-3 Cleveland Division of Water


Table 3.3 presents the results of operations by CWD budget category.

Table 3.3 - Historical O&M Expenses by CWD Budget Category


2010
($1,000s) 2006 2007 2008 2009
(estimate)
Salaries and Wages $54,156 $54,496 $53,570 $57,253 $53,266
Employee Benefits 20,807 20,521 20,926 22,437 22,899
Utilities 21,854 21,978 22,032 21,756 22,689
Contractual Services 4,466 7,960 9,769 6,975 4,319
Materials & Supplies 10,266 9,517 10,483 11,448 10,769
Maintenance 6,347 14,023 15,684 12,266 12,232
Claims Refunds Miscellaneous 7,058 2,948 2,832 4,011 3,436
Interdepartmental Service Charges 7,925 8,767 8,537 7,935 7,213
Total Water O&M Expenses $132,879 $140,210 $143,833 $144,081 $136,824
Annual Percentage Change 5.5% 2.6% 0.2% -5.0%

Historically, CWD O&M expenditures have increased by approximately 3% annually. However


as demonstrated in Tables 3.2 and 3.3 recent history has demonstrated that the CWD O&M
expenditures have ranged from 5.5% to an estimated reduction of 5.0% in 2010. The recent
reductions are a result of cost containment and economic conditions (modest to no inflation).
These factors were taken into consideration when forecasting future O&M expenditures but it
was not used as the sole factor in estimating future expenses. Two additional factors were used
to forecast expenses.

MFSG met with CWD and City of Cleveland Finance Department Staff to discuss any known (or
estimated) future operating cost increases. The City Finance Department provided guidance
regarding estimates for salaries and benefits based on existing labor agreements. Salaries are
estimated to increase by 2% annually over the study period. The majority of employee benefits
are estimated to increase by 5% annually over the study period. The City estimates that
hospitalization will increase by 15% in 2014 due to labor agreements.

O&M expenses for which CWD or the City did not provide guidance were forecasted using a
number of trended industry cost indices. The commodity fuel index, municipal cost index,
construction cost index, consumer price index and producer price index were trended over the
period 2000 - 2009 to develop linear trends that were applied to individual expense items based
on type of expenses (i.e. fuel purchases were trended using the commodity fuel index). Table 3.4
presents the trended cost indices over the study period for each index.

Table 3.4 - Cost Index Trends


2011 2012 2013 2014 2015
Commodity Fuel Index 7.4% 6.9% 6.5% 6.1% 5.7%
Municipal Cost Index 2.9% 2.8% 2.7% 2.6% 2.6%
Construction Cost Index 3.1% 3.0% 2.9% 2.8% 2.7%
Consumer Product Index 2.2% 2.2% 2.1% 2.1% 2.1%
Producer Price Index 3.3% 3.2% 3.1% 3.0% 2.9%

MFSG 3-4 Cleveland Division of Water


Due to the significant reduction in operating expenses in 2010, an average of 2009 and 2010
operating expenses was used as a base year for forecasts. The base year was increased based on
the cost increases discussed above to develop forecasts for O&M expenses over the study period.

One of the major operational changes that will occur over the study period is the implementation
of automatic meter reading (AMR). The implementation of AMR is anticipated to positively
impact CWD’s operating expenses resulting in reductions in expenses beginning in 2012.

The results of the forecast are shown in Tables 3.5 and 3.6 by section and budget category,
respectively.

Table 3.5 - Projected O&M Expenses by CWD Section Category


($1,000s) 2011 2012 2013 2014 2015
Customer Account Services $10,954 $11,642 $12,020 $12,489 $12,879
Plant Operations 40,793 43,356 44,764 46,512 47,962
Budget and Finance 10,754 11,430 11,801 12,262 12,644
Information Technology 2,403 2,554 2,637 2,740 2,826
Distribution and Maintenance 35,230 37,444 38,660 40,169 41,422
Administration / Water Management 26,731 28,411 29,333 30,479 31,429
Engineering 14,292 15,190 15,683 16,296 16,804
Anticipated Savings from AMR - (2,000) (4,000) (6,000) (8,000)
Total Water O&M Expenses $141,158 $148,026 $150,898 $154,947 $157,965
Annual Percentage Change 3.2% 4.9% 1.9% 2.7% 1.9%

Table 3.6 - Projected O&M Expenses by CWD Budget Category


($1,000s) 2011 2012 2013 2014 2015
Salaries and Wages $55,351 $59,225 $60,410 $61,618 $62,850
Employee Benefits 22,990 23,958 24,805 26,805 27,749
Utilities 22,694 24,508 25,963 27,419 28,875
Contractual Services 7,570 7,948 8,163 8,378 8,593
Materials & Supplies 10,914 11,665 12,221 12,777 13,333
Maintenance 11,532 12,108 12,436 12,763 13,091
Claims Refunds Miscellaneous 2,895 3,040 3,122 3,205 3,287
Interdepartmental Service Charges 7,213 7,573 7,778 7,983 8,187
Anticipated Savings from AMR - (2,000) (4,000) (6,000) (8,000)
Total Water O&M Expenses $141,158 $148,026 $150,898 $154,947 $157,965
Annual Percentage Change 3.2% 4.9% 1.9% 2.7% 1.9%

The forecasted O&M expenses demonstrate an estimated annual percentage increase of between
4.9% and 2.0%. It should be noted that the increases in operating and maintenance expenses
over the study period are below historical increases (3% to 4% annually) and that the increases
are estimated to decrease over the period. This is due to a concerted effort on the part of CWD
to manage operating and maintenance costs. Specifically, CWD has undertaken or plans to
initiate during the study period the following efforts to reduce and contain O&M expenses:

MFSG 3-5 Cleveland Division of Water


• Consolidation of operations on a department-wide basis.
• Reduce energy with a 10% reduction in energy usage over the next 3 years resulting in $2
million in annual savings.
• Cross training of employees specifically in customer service and distribution &
maintenance.

The recent reductions in O&M expenses in 2010 are reflective of these efforts. In addition to the
efforts mentioned, CWD is estimated to realize savings from the implementation of AMR as
presented in Tables 3.5 and 3.6. The forecasted O&M expenses are presented graphically in
Exhibits 3.3 and 3.4.

Exhibit 3.3 - Projected O&M Expenses by Section ($1,000s)












    
 
  
 
 

MFSG 3-6 Cleveland Division of Water


Exhibit 3.4 - Projected O&M Expenses by Budgetary Category ($,000)










    
   
 
  
 

3.2 Capital Improvement Program


Ownership of a water system the size and age of the CWD system is extremely capital-intensive.
CWD has spent in excess of $1.6 billion for capital improvements since 1980. Most recently
over the last ten years, CWD has focused on the successful completion of its multi-year Plant
Enhancement Program (PEP). This program required capital investment of $750 million, which
when fully completed will have modernized and rehabilitated three of CWD’s four water
treatment plants. Over the next ten years, CWD anticipates investing an additional $723 million,
a portion of which includes the completion of PEP, as well as other significant initiatives. The
majority of the investment over the next ten years will fund rehabilitation and replacement of
buried assets, mainly in the distribution system.

The on-going funding of recent capital investments and future requirements has a significant
impact on the five year rate program. While the capital investments have a pronounced impact on
rates, the projects are vitally important to ensure the continued operation of the water system.
CWD could keep rates low initially by not maintaining the system but would pay a significant
price later as system failures spike due to a lack of system maintenance, which would then result
in increased costs and ultimately the need for even higher rate increases. Proactively managing
the water system through maintenance and capital investments allows CWD to keep rates stable
and lower over time.

The specific planning for capital investments for the study period (2011 – 2015) totals $298
million. The projects identified for the study period include investments that will rehabilitate
and replace aging infrastructure, as well as projects that will allow CWD to operate the water

MFSG 3-7 Cleveland Division of Water


system more effectively and efficiently. The planned capital investments cover a range of
projects including the final phase of the PEP program, cleaning and lining of existing water
transmission and distribution mains, replacing aging water mains, constructing additional storage
capacity, replacement of raw water pumps, raw water intake improvements, power-supply
upgrades/replacements and metering upgrades. Some of the major projects include the
following:

• $92 million for implementation of an automatic meter reading system and a meter right-
sizing program.
• $65 million for the suburban water main program.
• $36 million for City of Cleveland water line replacement.
• $8 million for installation of raw water pumps at Morgan Water Treatment Plant.
• $30 million for the City of Cleveland cleaning and lining program

A summary of the CWD capital improvement program by project type for the study period is
shown in Table 3.7. This table documents/shows the year in which funding is required for the
capital project, which may or may not correlate with the actual start of the project.

Table 3.7 - CWD Capital Improvement Program by Project Type


($1, 000s) 2011 2012 2013 2014 2015
Plant Improvements 6,850 6,300 12,600 19,800 10,880
Supply Mains - 7,000 7,650 6,000 5,500
Distribution Mains 5,000 12,000 16,000 16,000 16,000
Cleaning and Lining Mains 4,400 7,700 7,800 7,900 8,000
Secondary Station
- 14,500 9,000 3,000 4,000
Improvements
Building and Technology
1,500 10,000 10,000 4,000 2,000
Improvements
Automatic Meter Reading* - 42,000 - - -
Future Capital Projects - - - 5,000 10,000
Total $17,750 $99,500 $63,050 $61,700 $56,380
*$50 million was funded in 2010.

The funding summary for the capital projects is shown in Table 3.8.

Table 3.8 - CWD Capital Improvements Program by Funding Source


($1, 000s) 2011 2012 2013 2014 2015
Operating Revenue 6,750 26,800 25,850 19,200 22,880
Future Bonds - 30,700 37,200 42,500 33,500
Existing Bond Funds 11,000 - - - -
SRF Loans - - - - -
10-Year Bonds - 42,000 - - -
Total $17,750 $99,500 $63,050 $61,700 $56,380

Exhibit 3.5 shows the breakdown of funding for the capital improvement program over the study
period.

MFSG 3-8 Cleveland Division of Water


Exhibit 3.5 - Capital Improvements Program Funding Sources ($1,000s)


 

 

 






3.3 Cash Funded Capital Projects


As demonstrated in Table 3.8, CWD plans to fund on average about $20 million annually in
capital projects from annual operating revenues over the study period. This is consistent with the
historical level of cash funding of capital projects. On average CWD has typically funded the
capital program with about 80% debt and 20% cash. In total, approximately 66% of the five year
capital improvements program will be funded with debt. This is slightly below the historical
debt funding level and represents an intentional effort to minimize additional debt issuance.

In addition to cash funding capital projects, CWD has historically cash funded expenses for
professional services related to capital financing. The estimated expenses related to these
services are anticipated to be approximately $1.7 million annually over the study period.
Historically, these expenses have ranged from $0.6 million to close to $4.0 million annually. In
2010 these expenses were approximately $1.4 million.

3.4 Existing Debt


The capital investments made by CWD over the last decade have resulted in a significant amount
of ongoing expense in the form of debt service on revenue bonds and subordinated debt. As of
the end of 2010, CWD had approximately $922 million in principal on outstanding debt. The
debt consists of a series of revenue bond issues, state revolving fund (SRF) loans and 10-year
bonds. Table 3.9 shows the annual debt service payments for all CWD outstanding debt
(revenue bonds and loans) for the study period. The 10-year bonds were issued in 2010 and were
used to fund the first phase of the Automatic Meter Reading (AMR) project.

MFSG 3-9 Cleveland Division of Water


Table 3.9 - Existing Debt Service Payments
Total for
($1,000s) 2011 2012 2013 2014 2015
Period
Existing Revenue Bonds 82,700 75,523 71,138 68,269 66,318 $364,471
SRF Loans 10,030 10,030 10,030 10,030 10,030 $50,150
10-Year Bonds(1) 942 942 - - - $1,888
Total 93,672 86,494 81,168 78,299 76,348 $416,504
(1)
CWD anticipates rolling the bond anticipation notes into a second issue paying interest only for the first two
years.

The original principal amounts, outstanding balances (as of end of 2010) and purpose of each
Water Revenue Bond Series are provided in Table 3.10.

Table 3.10 - Existing CWD Revenue Bonds


Original
Outstanding
Series Issued Purpose Principal
Balance
Amount
Refunded a portion of Series A Bonds, Series
Series G 1993 D Bonds, Series E Bonds and Series F, 1992A $228,170,000 $94,830,000
Bonds
Water system improvements and refunded a
Series H 1996 portion of the Series E Bonds, Series F, 1992A 204,885,000 2,020,000
Bonds and Series F, 1992B Bonds
Refunded the Series F Bonds and a portion of
Series J 2001 92,595,000 43,230,000
the Series G Bonds and Series H Bonds
Water system improvements and refunded the
Series K 2002 138,050,000 52,810,000
Series D Bonds
Refunded portions of the Series H Bonds and
Series N 2005 64,480,000 33,045,000
the Series I Bonds
Series O 2007 Water system improvements 143,570,000 138,725,000
Series P 2007 Refunded portions of the Series I Bonds 135,410,000 135,410,000
Series Q 2008 Refunded all of the Series L Bonds 90,800,000 90,800,000
Series T 2009 Refunded portions of the Series M Bonds 84,625,000 83,340,000
Series U 2010 Refunded Series R Bonds 54,935,000 54,935,000
Series V 2010 Refunded Series S Bonds 26,435,000 26,495,000
Total $755,640,000

The SRF Loans shown in Table 3.9 consist of loans made available through the Ohio
Environmental Protection Agency (EPA) Division of Environmental and Financial Assistance
(OEPA) and are administered by the Ohio Water Development Authority (OWDA). The SRF
loans are project specific. When available, these loans provide the opportunity to borrow funds
at lower interest rates than required for municipal revenue bonds. Also since these loans are
considered subordinated debt (ranking after revenue bond debt, meaning that these loans are
repayable only after the revenue bond debt has been paid), annual loan payments are not used in
calculating the debt service coverage ratio. CWD currently has nine OWDA loans with
outstanding principal of approximately $117 million. Currently, there are no SRF loans
contemplated by CWD during the study period. However, if there are any SRF loans offered,

MFSG 3-10 Cleveland Division of Water


CWD will take advantage of this program by substituting a revenue bond funded project thereby
reducing the size of any new money issue.

3.5 Projected Future Debt


As demonstrated in Table 3.8, CWD will need to issue additional debt over the study period to
continue to fund its capital improvement program. The projects will be funded with long-term
debt in the form of revenue bonds. CWD plans to utilize short-term financing (10-year bonds) to
fund the second phase of the Automatic Meter Reading (AMR) project. At this time, CWD has
not identified any capital projects that will be funded with State Revolving Loan Funds. Table
3.11 presents the anticipated financing terms and timing for the projected future debt.

Table 3.11 - CWD Projected Future Debt Terms


Interest Principal
Type Issue Date Maturity Purpose
Rate Amount
Water Revenue Fund water system improvements
2012 5.5% 30 years $67,900,000
Bond, Series W and replacements
Fund Phase I & II of the
10-Year Bonds(1) 2012 4.5% 11 years Automated Meter Reading and $94,000,000
Meter Right-Sizing Project
Water Revenue Fund water system improvements
2014 6.0% 30 years $76,000,000
Bonds, Series X and replacements
Total $237,900,000
(1)
Assumes Phase I is rolled into Phase II of AMR

Table 3.11 shows the 10-year bond financings used to fund the second phase of the AMR
project. CWD plans to secure a bond anticipation note for the financing which will include one
year of interest only payments (in the first year) after which the financing would be converted
into 10-year revenue bonds after 12 months. The first year of interest only payments are
assumed to be at an interest rate of 2%.

Table 3.12 presents the anticipated annual additional debt service for future debt issues over the
study period.

Table 3.12 - Projected Future Debt Service


Total for
($1,000s) 2011 2012 2013 2014 2015
Period
Series W(1) - - 4,726 4,726 4,726 14,178
10-Year Bonds (2012)(2) - - 1,600 10,887 10,887 23,375
Series X(1) - - - - 5,585 5,585
Total $- $- $6,326 $15,613 $21,198 $43,137
(1)
It is assumed that CWD will capitalize interest for the first year of each of the water revenue bond issues.
(2)
10-Year Bonds consist of bank anticipation note as discussed above converted to longer term revenue bonds after
12 months.

The combination of existing debt and projected future debt service for the study period is shown
in Exhibit 3.6.

MFSG 3-11 Cleveland Division of Water


Exhibit 3.6 - Existing and Projected Annual Debt Service ($1,000s)













    
   

The total portion of the annual revenue requirements attributed to annual debt service range from
a high of 39% of the revenue requirements in 2011 to a low of 32.9% in 2012 and 2013. We
typically recommend that utilities set a ceiling on debt repayments of approximately 35% of
revenue requirements. While CWD slightly exceeds this recommended ceiling in 2011, the
issuance of additional debt in 2012 and 2015 does not cause CWD to exceed the ceiling in any
other year due to the reduction in annual payments on existing debt. Therefore the planned level
of debt issuance will not place CWD in a position where a greater portion of revenues are
required for debt service in comparison to total revenue requirements. However CWD should
continue to evaluate opportunities to use revenues from operations whenever possible to avoid /
limit interest expense.

3.6 Reserves
Best management practices dictate that cash reserves be accumulated to provide for
contingencies and unplanned major expenses. The development of cash reserves serve to
provide funds for unexpected capital investment requirements, fluctuations in annual revenues
and unforeseen operating and maintenance expenses. Cash reserves are viewed favorably by the
financial markets and ultimately reduce the cost of issuing debt. For these reasons we
recommend that utilities develop two specific types of reserves which include an Operating and
Maintenance (O&M) Reserve and a Repair, Renewal and Rehabilitation (“3R”) Reserve. Each
reserve is discussed in the following sections of the report.

3.6.1 Operating and Maintenance Reserve

An operating and maintenance reserve is important to provide funds for unplanned minor repairs
or fluctuations in the budget. This type of reserve is also valuable during unusually wet or dry
years, which could result in reduced revenues due to lower than anticipated consumption levels
or increased expenses due to higher than anticipated water demands. As these reserves are

MFSG 3-12 Cleveland Division of Water


accumulated, they can be used in future years to offset, decrease, or defer rate increases.
Operating reserves are typically established as a percentage of a system’s O&M budget. We
typically recommend that utilities formally establish and maintain a substantial operating reserve
of at least three months of O&M expenses, with a higher balance for financially challenged
utilities of at least six month of O&M expenses (half of current annual O&M expenses) with an
ideal target balance of 9-months of annual O&M expenses. CWD currently maintains an
operating reserve with a minimum target balance of $100,000,000 (referred to as unencumbered
cash). Based on the operating and maintenance budget for 2010, this is almost 9-months of
operating expenses. However as operating and maintenance expenses increase over the study
period the current target balance will represent approximately 6-months by 2015. For this reason
we recommend that CWD continue to maintain a minimum operating balance of at least
$100,000,000. When CWD considers a rate program for the period following 2015, a revised
target balance should be considered as the 6-month target will most likely exceed the
$100,000,000 level due to continual increases in O&M expenses.

3.6.2 Repair, Renewal and Rehabilitation Reserve

Many municipal utilities establish Repair, Replacement and Rehabilitation (“3R”) reserves to
provide funds to pay for unexpected major repairs and planned replacement or rehabilitation of
system assets, as mentioned above. These reserves can be used to pay for capital costs in order
to avoid or minimize the amount that would otherwise be recovered through user fees (and
possibly result in a significant rate increase). Typically, the annual “3R” reserve contribution is
calculated based on the estimated useful life and replacement cost of each asset. The
recommended annual “3R” contribution is offset (reduced) by the actual annual amount of
investment planned by CWD.

To evaluate the need for a “3R” Reserve, MFSG completed a detailed review of the CWD water
system buried infrastructure. The goal of the review was to provide CWD with an estimate of the
annual investment required in the system to appropriately maintain the system and strive towards
maximizing the asset’s useful life. The annual investment required was compared to the planned
annual investment with the difference between the required and the planned set aside in a “3R”
Reserve. The results of our review of CWD’s buried infrastructure are shown in Table 3.13.

Table 3.13 - Buried Asset Review


Hydraulic Percentage of Pipe Exceeding Replacement Cost of Pipe
Linear Feet of Pipe
Zone Useful Life(1) Exceeding Useful Life(2)
Low 5,496,036 64% $166,194,285
1st 6,439,498 45% $122,588,072
2nd 8,712,542 39% $128,161,696
3rd 6,804,019 10% $26,260,729
Total 27,452,094 38% $443,204,782
(1)
Assumes a 100-year useful life for CWD water mains.
(2)
Based on estimated repair/relining cost of main based on size of line with average of $190 per linear foot.

Table 3.13 demonstrates that approximately 38% of the water mains and lines in the CWD water
system are currently beyond their estimated useful life. It is important to note that the useful life
is only an estimate, but it serves as a proxy for the age of the water system. In addition it is

MFSG 3-13 Cleveland Division of Water


typically more cost effective to repair water lines rather than to replace them. But at some point
failures in mains becomes a level of service issue and mains then require replacement. To assess
the need for a “3R” Reserve and contributions to the reserve, it is assumed that CWD will
address pipe currently exceeding its useful life over the next 20-years and that it will repair and
replace portions of buried infrastructure that exceed their useful life over this period, which
defines the required investment in existing buried infrastructure. A comparison of the required
investment and the actual planned investment is shown in Exhibit 3.7.

Exhibit 3.7 - Planned Buried Infrastructure Investment and Required Investment ($1,000)
















          

 
Exhibit 3.7 demonstrates that CWD plans to investment significantly in buried infrastructure
over the next ten years. The planned investment exceeds the required investment (as defined by
the asset review). It should be noted that this does not mean that CWD is investing more than it
should in infrastructure. It means that CWD is investing more than the minimum required
reinvestment. The buried infrastructure investments identified in the CWD capital improvement
program are more thoroughly developed compared to the asset review completed for this study,
which considers buried assets at a very high level to establish a minimum investment
requirement. Based on our review of the planned investment, we recommend that CWD not set
aside additional funds in a “3R” Reserve at this time.

3.7 Revenue Requirements


The revenue requirements (that is, the total cash needed for operation of the water system)
encompass each of the categories of expenses discussed in this section of the report. The
revenue requirements can be classified into two major categories:

MFSG 3-14 Cleveland Division of Water


Operating Costs Percent of Total Revenue Requirement
Operating and Maintenance Expenses 56%

Capital Costs
Existing Debt Service (Bonds and Loans) 31%
Projected New Debt Service 4%
Cash-funded Capital Projects 9%

Table 3.14 shows the total revenue requirements over the study period.

Table 3.14 - Projected Revenue Requirements


($1,000s) 2011 2012 2013 2014 2015
Operating Expenses
Salaries and Wages 55,351 59,225 60,410 61,618 62,850
Employee Benefits 22,990 23,958 24,805 26,805 27,749
Utilities 22,694 24,508 25,963 27,419 28,875
Contractual Services 7,570 7,948 8,163 8,378 8,593
Materials & Supplies 10,914 11,665 12,221 12,777 13,333
Maintenance 11,532 12,108 12,436 12,763 13,091
Claims Refunds Miscellaneous 2,895 3,040 3,122 3,205 3,287
Interdepartmental Service Charges 7,213 7,573 7,778 7,983 8,187
Anticipated Savings from AMR - (2,000) (4,000) (6,000) (8,000)

Total Operating Expenses $141,158 $148,026 $150,898 $154,947 $157,965

Capital Expenses
Outstanding Revenue Bonds 82,700 75,523 71,138 68,269 66,318
Outstanding Loans 10,030 10,030 10,030 10,030 10,030
Projected Debt Service - Bonds - - 4,726 4,726 10,311
Projected Debt Service - Short-term 942 942 1,600 10,887 10,887
Cash Funded Capital Projects 6,750 26,800 25,850 19,200 22,880
Capital Financing Professional Services 1,300 1,700 1,700 1,700 1,700

Total Capital Expenses $101,722 $114,994 $115,044 $114,812 $122,126

Total Revenue Requirement $242,880 $263,020 $265,942 $269,759 $280,091


Annual Change from Previous Year 1.8% 8.3% 1.1% 1.4% 3.8%

The annual revenue requirements total approximately $1.32 billion over the study period. The
annual revenue requirements increase year-over-year during the study period. The operating and
maintenance expenses are fairly consistent over the period but changes in capital cause the
revenue requirements to vary year-over-year, as demonstrated in the change in capital expenses
between 2011 and 2012. Exhibit 3.8 shows the annual revenue requirements for the study period
by major category. Exhibit 3.9 shows the cumulative breakdown of the revenue requirements by
MFSG 3-15 Cleveland Division of Water
major category over the study period. Finally, Exhibit 3.10 shows the revenue requirements for
CWD over the ten-year period 2006 to 2015, allowing for comparison of historical and projected
revenue requirements.

Exhibit 3.8 - Projected Revenue Requirements ($1,000s)















    

     

Exhibit 3.9 - Cumulative Breakdown of Revenue Requirements Over Study Period ($1,000s)

 
 



 
 
 


MFSG 3-16 Cleveland Division of Water


Exhibit 3.10 - Historical and Projected Revenue Requirements ($1,000s)













         

   

Exhibit 3.10 demonstrates a reduction in revenue requirements in 2010 and 2011. The
reductions are primarily due to limiting cash funded capital projects during these two years.

3.8 Summary
The CWD annual revenue requirements will continue to increase over the study period due to
increases in operating and maintenance expenses, repayment of existing debt, and ongoing
required capital investments in the system funded with cash and through the issuance of debt.
CWD continues to pursue opportunities too for cost savings through operating efficiency such as
the implementation of Automatic Meter Reading. These efficiencies are reflected in the revenue
requirements. However, even with cost containment, the fact is that a significant portion
(approximately 80%) of the cost of operating and maintaining the system are fixed and outside
the control of CWD. The annual revenue requirements will total approximately $1.32 billion
over the study period. The average annual increase in revenue requirements is 3.3%. The
cumulative increase in revenue requirements over the study period is approximately 16.5%. It
should be noted that an annual revenue requirement increase of less than 3.0% during most years
demonstrates that CWD is attempting to minimize increases in operating and maintenance
expenses as inflation alone would typically result in an annual increase of approximately 3.0%.

MFSG 3-17 Cleveland Division of Water


4.0 CUSTOMER/CONSUMPTION ANALYSIS

The purpose of this chapter is to summarize CWD customer account and consumption history
and to demonstrate current customer water usage patterns. Review of historical number of
customer accounts and billable consumption history shows clear trends in customer account and
consumption growth/decline. Review of individual current customer usage by account provides
insight into how CWD’s various customers are using water which assists in evaluating the
current methods (rate structure) used to charge customers for use of the water system.

4.1 Customer Account and Consumption History


The following section outlines historical customer account and consumption history for the
period 2005 through 2010. The history is presented using actual 2005, 2006, 2007, 2008, 2009
and 2010 usage and customer account data.

4.1.1 Customer Account History Summary

CWD currently classifies retail customers as residential and commercial. The split between
residential and commercial is based on meter size rather than on land use or type of
establishment. Accounts with meters sized 1-inch or less are classified as residential, accounts
with meters sized over 1-inch are classified as commercial. Customer accounts are also
classified by rate district, which is defined by their location within the service area.

Tables 4.1 and 4.2 provide actual active accounts by rate district and class for the period 2005
through 2010. The tables demonstrate that over the last six years the number of customer
accounts has been declining. The only rate districts that have experienced net increases in
customer accounts are Low/1st High and 3rd High. The City of Cleveland experienced the
greatest five-year loss in customers with an overall decline of about 7.15%. The overall total
number of customer accounts declined by about 1.2% over the six-year period.

Table 4.1 - Customer Account Breakdown by Rate District


2005 - 2010
2005 2006 2007 2008 2009 2010
Change (%)
Cleveland 133,243 129,592 128,630 125,657 124,832 123,715 -7.15%
st
Low/1 High 79,181 79,107 78,460 80,855 79,913 84,160 6.29%
nd
2 High 124,619 124,623 124,078 123,562 120,527 123,856 -0.61%
rd
3 High 83,455 84,065 83,280 82,509 81,840 83,674 0.26%
Total 420,498 417,387 414,448 412,583 407,112 415,404 -1.21%
Change in # Accts (3,111) (2,939) (1,865) (5,471) 8,292 
Percent Change
-0.74% -0.70% -0.45% -1.33% 2.04% 
per year

Table 4.2 shows that there was a more significant decrease in commercial customers compared
to residential customers over the six-year period.

MFSG 4-1 Cleveland Division of Water


Table 4.2 - Customer Account Breakdown by Customer Class
2005 - 2010
2005 2006 2007 2008 2009 2010
Change (%)
Residential 405,398 402,450 398,933 397,707 392,440 401,117 -1.06%
Commercial 15,100 14,937 15,515 14,876 14,672 14,287 -5.38%
Total 420,498 417,387 414,448 412,583 407,112 415,404 -1.21%
Change in # Accts (3,111) (2,939) (1,865) (5,471) 8,292
Percent Change
-0.74% -0.70% -0.45% -1.33% 2.04%
per year

A more detailed breakdown of customer accounts by rate district and customer class is shown
below in Table 4.3.

Table 4.3 - Summary of Accounts by Rate District and Customer Class


2005 2006 2007 2008 2009 2010
Cleveland
Residential 128,497 124,989 123,831 121,170 120,374 119,549
Commercial 4,746 4,603 4,798 4,487 4,458 4,166
Total Cleveland 133,243 129,592 128,629 125,657 124,832 123,715
Change (3,651) (963) (2,972) (825) (1,117)
% Change -2.74% -0.74% -2.31% -0.66% -0.89%
Low/1st High
Residential 75,847 75,816 74,995 77,450 76,564 79,229
Commercial 3,334 3,291 3,465 3,405 3,349 4,930
Total Low/1st High 79,181 79,107 78,460 80,855 79,913 84,160
Change (74) (647) 2,395 (942) 4,247
% Change -0.09% -0.82% 3.05% -1.17% 5.31%
2nd High
Residential 120,709 120,726 120,044 119,680 116,738 120,822
Commercial 3,910 3,898 4,034 3,882 3,789 3,034
Total 2nd High 124,619 124,624 124,078 123,562 120,527 123,856
Change 5 (546) (516) (3,035) 3,329
% Change 0.00% -0.44% -0.42% -2.46% 2.76%
rd
3 High
Residential 80,345 80,920 80,063 79,407 78,763 81,517
Commercial 3,110 3,146 3,218 3,102 3,077 2,157
Total 3rd High 83,455 84,066 83,281 82,509 81,840 83,674
Change 611 (785) (772) (669) 1,834
% Change 0.73% -0.93% -0.93% -0.81% 2.24%
Total 420,498 417,389 414,448 412,583 407,112 415,404
Change (3,109) (2,941) (1,865) (5,471) 8,292
% Change -0.74% -0.70% -0.45% -1.33% 2.04%

The six year average of the number of customer accounts included in each rate district is shown
in Exhibit 4.1.

MFSG 4-2 Cleveland Division of Water


Exhibit 4.1 - 6-Year Average Number of Accounts by Rate District

 
 









The historical number of customer accounts by rate district is shown in Exhibit 4.2.

Exhibit 4.2 – Historical Customer Accounts by Rate District













     

   

MFSG 4-3 Cleveland Division of Water


4.1.2 Consumption History Summary

Metered water consumption is measured in thousand cubic feet (MCFs), where one MCF is
approximately 7,500 gallons. Customers are charged for metered water use through a rate
structure that is specific for each rate district. The rate districts are defined by location within the
CWD service area.

Tables 4.4 and 4.5 provide billed consumption information by rate district and customer class for
2005 through 2010. The tables demonstrate that water consumption has declined significantly
over the past five years, with declines occurring in every year except 2007. System-wide
consumption declined by approximately 18.8% over the period with the most significant declines
occurring in the City of Cleveland which experienced a 19.4% decrease. The decline in water
consumption from master meter customers is substantial but it should be noted that in 2008, East
Cleveland which was formerly a master meter customer, was converted to a direct service
suburb. This change accounts for the majority of the decline in master meter consumption over
the period. The reason for the increase in water consumption in 2007 is not clear. However it
was a fairly dry year which may account for increased water use.

Table 4.4 - Billed Consumption by Rate District (MCFs)


2005 - 2010
2005 2006 2007 2008 2009 2010
Change (%)
Cleveland 2,589,264 2,439,491 2,416,435 2,384,337 2,266,297 2,087,873 -19.36%
Low/1st High 1,407,942 1,359,741 1,406,482 1,393,290 1,270,931 1,170,872 -16.84%
2nd High 1,558,384 1,479,540 1,535,381 1,478,209 1,379,101 1,270,526 -18.47%
3rd High 1,210,957 1,156,717 1,216,460 1,157,580 1,075,191 990,542 -18.20%
Sub-Total 6,766,547 6,435,489 6,574,758 6,413,416 5,991,520 5,519,812 -18.42%
Master Meters 887,408 827,688 828,094 655,401 747,641 688,779 -22.38%
Total 7,653,955 7,263,177 7,402,852 7,068,817 6,739,161 6,208,591 -18.88%
Change (390,778) 139,675 (334,035) (329,656) (530,570)
Percent Change -5.11% 1.92% -4.51% -4.66% -7.87%

Table 4.5 - Billed Consumption by Customer Class (MCFs)


2005 - 2010
2005 2006 2007 2008 2009 2010
Change (%)
Residential 3,737,691 3,486,296 3,636,822 3,576,005 3,302,460 3,042,460 -18.60%
Commercial 3,028,856 2,949,193 2,937,936 2,837,411 2,689,060 2,477,352 -18.21%
Sub-Total 6,766,547 6,435,489 6,574,758 6,413,416 5,991,520 5,519,812 -18.42%
Master Meters 887,408 827,688 828,094 655,401 747,641 688,779 -22.38%
Total 7,653,955 7,263,177 7,402,852 7,068,817 6,739,161 6,208,591 -18.88%
Change (390,778) 139,675 (334,035) (329,656) (530,570)
Percent Change -5.11% 1.92% -4.51% -4.66% -7.87%

Table 4.5 shows the changes in water consumption for residential and commercial customer
classes. The table demonstrates that the decline in water consumption has been more significant
within residential customers as compared to commercial, which is consistent with the decline in

MFSG 4-4 Cleveland Division of Water


the number of customers between the two classes. Exhibit 4.3 presents graphically the historical
water consumption by rate district.

Exhibit 4.3 - Historical Water Consumption by Rate District




















     

    

4.2 Residential Customer Usage Patterns


While it is important to examine overall trends in total customer accounts and water
consumption, the demonstration of how much water CWD customers are using on a per account
basis is critical to assessing the appropriateness of the water rate structure and to develop
alternative rate structures. To examine customer usage patterns, CWD provided the project team
with individual customer water consumption, from the billing system database, on a per account
basis for the years 2007 and 2008. Using the data, statistics of actual per account consumption
were analyzed for all rate districts for 2007 and 2008. Each rate district was analyzed separately
and the results are presented in the following section.

The analysis below reveals that average water usage per residential customer account has
decreased in recent years from about 3 MCFs per quarter in the 1990’s to around 2.5 to 2.0
MCFs recently depending on rate district. The average quarterly usage by rate district for
residential customers is shown in Table 4.6.

Table 4.6 - Average Residential Water Consumption Per Quarter Per Account
(MCFs) System
Cleveland Low 1st High 2nd High 3rd High
Year Wide
2007 2.44 2.18 2.21 2.16 2.34 2.36
2008 2.48 2.08 2.16 2.06 2.28 2.31
2009 2.32 2.00 2.15 1.96 2.10 2.10
2010 2.15 1.78 1.92 1.74 1.87 1.90

MFSG 4-5 Cleveland Division of Water


The decline in the average usage per account is not surprising given factors such as smaller
household sizes and the use of more efficient water fixtures and appliances both of which are
discussed in more detail in Section 5 of this report. However, the average consumption per
account does not necessarily reveal how much water most residential customers are using.
Average usage is influenced by customers that use very little water and those that use a
significant amount of water. The analysis presented in Table 4.7 was developed to provide a
better understanding of how many customers use water at different levels. The table illustrates
the cumulative percentage of residential customers who use a certain quantity of water or less per
quarter (in 2008) for each of the rate districts.

Table 4.7 - Rate District Residential Usage Patterns (2008)


Cumulative % of
Cleveland Low 1st High 2nd High 3rd High
Accounts Using
0.6 MCF or less 17.3% 16.2% 18.8% 14.4% 12.7%
1 MCF or less 29.3% 29.0% 30.1% 27.3% 23.7%
2 MCF or less 57.5% 61.6% 60.6% 61.8% 57.3%
5 MCF or less 90.2% 94.3% 94.2% 95.4% 94.4%
10 MCF or less 97.1% 98.4% 98.5% 98.9% 98.6%
25 MCF or less 99.5% 99.7% 99.8% 99.8% 99.8%

Table 4.7 demonstrates that during 2008 over a quarter of customer accounts used 1 MCF or less
and over half of customer accounts used 2 MCF or less. This is consistent with the averages
shown in Table 4.6 but further illustrates that most residential customers do not use 3 MCF per
quarter as was more typical historically. The fact that about 60% of residential customers use 2
MCF or less is important in regards to review of the current water rate structure which is
discussed in more detail in Section 9.

To further demonstrate customers usage patterns the following Exhibits 4.4 through 4.8 were
developed. The exhibits present the distribution of the number of customers using specific
amounts of water within each rate district.

MFSG 4-6 Cleveland Division of Water


Exhibit 4.4 - Residential Usage Patterns - Cleveland (2008)

9,000
8,000
7,000
Number of Customers

6,000
5,000
4,000
3,000
2,000
1,000
0

Consumption (MCF's)

Qtr 1 Qtr 2 Qtr 3 Qtr 4

Exhibit 4.5 - Residential Usage Patterns - Low (2008)

2,000
1,800
1,600
Number of Customers

1,400
1,200
1,000
800
600
400
200
-

Consumption (MCF's)

Qtr 1 Qtr 2 Qtr 3 Qtr 4

MFSG 4-7 Cleveland Division of Water


Exhibit 4.6 - Residential Usage Patterns - 1st High (2008)

4,500

4,000

3,500
Number of Customers

3,000

2,500

2,000

1,500

1,000

500

Consumption (MCF's)
Qtr 1 Qtr 2 Qtr 3 Qtr 4

Exhibit 4.7 - Residential Usage Patterns - 2nd High (2008)

10,000
9,000
8,000
Number of Customers

7,000
6,000
5,000
4,000
3,000
2,000
1,000
-

Consumption (MCF's)

Qtr 1 Qtr 2 Qtr 3 Qtr 4

MFSG 4-8 Cleveland Division of Water


Exhibit 4.8 -Residential Usage Patterns - 3rd High (2008)

7,000

6,000
Number of Customers

5,000

4,000

3,000

2,000

1,000

Consumption (MCF's)

Qtr 1 Qtr 2 Qtr 3 Qtr 4

Exhibits 4.4 through 4.8 demonstrate that there are variations between customer usage patterns
depending on the geographic location within the CWD service area. In general residential
customers located in 1st High, 2nd High and 3rd High use more water per account than those
located in the City, with 3rd High customers using the most water per account. The largest
number of customers in the City use about 1.0 MCF per quarter. By comparison the largest
number customers in 3rd High use approximately 1.7 MCF per quarter.

4.3 Commercial Customer Usage Patterns


A detailed review of commercial water usage patterns was completed as well. The average usage
per account for each rate district is shown in Table 4.8.

Table 4.8 - Average Commercial Water Consumption Per Quarter Per Account
(MCFs) System
Cleveland Low 1st High 2nd High 3rd High
Year Wide
2007 68.07 39.23 60.30 33.90 39.22 51.20
2008 67.57 34.01 55.66 32.07 35.09 49.98
2009 64.51 34.16 55.88 30.45 33.54 45.82
2010 63.59 30.20 47.49 33.54 44.08 43.69

Table 4.8 demonstrates that the average quarterly consumption per commercial account has
declined from 2007 to 2010 for most all rate districts. The table shows that the average
commercial usage also varies significantly depending on geographic location in the service area.
Similar to residential customers, the use of averages does not demonstrate how much water the
majority of customers are using. In fact, due to the wide variations in the type of use by

MFSG 4-9 Cleveland Division of Water


commercial customers, the average usage is even less representative of how much water the
majority of customers use.

The analysis presented in Table 4.9 was developed to provide a better understanding of how
much water commercial customers use. The table illustrates the cumulative percentage of
commercial customers who use a certain quantity of water or less per quarter for each of the rate
districts.

Table 4.9 - Rate District Commercial Usage Patterns (2008)


Cumulative % of
Cleveland Low 1st High 2nd High 3rd High
Accounts Using
1 MCF or less 22.9% 16.4% 20.4% 14.5% 14.6%
2 MCF or less 29.8% 24.9% 29.4% 24.3% 26.2%
5 MCF or less 42.4% 39.9% 42.0% 40.1% 43.5%
10 MCF or less 53.7% 52.4% 53.6% 53.3% 57.4%
15 MCF or less 61.3% 65.2% 61.7% 61.9% 66.1%
20 MCF or less 66.7% 73.0% 68.0% 68.1% 71.9%
25 MCF or less 70.5% 78.1% 72.8% 73.3% 76.3%
40 MCF or Less 77.6% 85.9% 82.0% 83.0% 84.6%

During 2008 over three-quarters of commercial customers in the City used 40 MCF per quarter
or less, compared to an average usage of 67 MCF shown in Table 4.8. In general across all of
the rate districts, over half of commercial customers use 10 MCF or less.

4.4 Conclusions
A review of the trends in the number of customer accounts and water consumption over the past
six years reveals a continued decline in the number of customer accounts and resulting water
consumption. The City of Cleveland has experienced the most significant decline in customer
accounts and water consumption. One of the reasons for the decline in water consumption
appears to be the reduction in water usage per account. The average usage per customer account
has declined over the last six years and a detailed review of usage per account demonstrates that
a significant number of customers use a minimal amount of water per quarter. The primary
reasons for the changes in usage per account are discussed in greater detail in Section 5.

MFSG 4-10 Cleveland Division of Water


5.0 WATER DEMAND FORECAST

This chapter of the report presents a customer account and water consumption demand forecast
for the CWD service area for the period 2011 - 2015. The forecast was completed by Paul
Coomes, Ph.D. (Professor of Economics) and Barry Kornstein (Senior Research Analyst)
working for the University of Louisville as sub-consultants to the MFSG project team. Dr.
Coomes and Mr. Kornstein developed the forecast and authored the majority of this section of
the report.

5.1 Summary
Water usage in the Cleveland service area has been declining for many years, primarily due to a
steady reduction in water use per customer. For example, over the past three decades the number
of residential customers has grown by 12%, while the average water usage per customer has
fallen by 33%. The net result is 25% less residential water consumption in 2008 than in 1978, a
decrease of nine billion gallons per year. Similarly, commercial water customers have been
reducing their water usage by 3.5 to 4.0% per year, more than offsetting the growth in the
number of customers, and resulting in a halving of commercial water consumption since 1983.

The decline in residential usage per customer is due primarily to a reduction in the number of
persons per household and to the introduction of water-conserving appliances and low flow
devices. Declining household size has resulted in more residential customers accounts even as
the population of Cleveland has fallen. Thus, the utility is faced with an expansion of the water
supply system while the average customer is using less water, creating a planning and financial
challenge.

In this section of the report we present and discuss our forecasts of water usage for the service
areas of City of Cleveland Divisions of Water and Water Pollution Control. Residential water
forecasts have been prepared at the census tract level and aggregated up to water pressure zones.
Commercial water forecasts were prepared at the aggregate level only.

The forecasts estimate that residential and commercial water usage will continue to decline over
the next few years. For residential customers, the exceptions are mostly in Medina and Summit
counties plus scattered areas in the far western and eastern sections of Cuyahoga County, most
notably Olmsted Township, and the villages of Highland Hills, Oakwood and Glenwillow.

5.2 Declining Water Consumption


Consider the history of residential water usage by customers of the City of Cleveland Division of
Water. As mentioned above, over the past three decades the number of customer accounts has
grown by 12%, while the average water usage per customer has fallen by 33%. The net result is
25% less residential water consumption in 2008 than in 1978, a decrease of nine billion gallons.
The pattern, shown in the chart below, is very similar to that for most large utilities in the United

MFSG 5-1 Cleveland Division of Water


States1. We will focus here on the possible causes of the decline in water usage per customer,
shown in blue in Exhibit 5.1.

Exhibit 5.1 - CWD Residential Customers and Average Water Usage per Customer
15 410,000

Water Usage per Customer 400,000


14

Customers
390,000
13

380,000
12

370,000

# of customers
MCF per year

11

360,000

10

350,000

9
340,000

8
330,000

7
320,000

6 310,000

A glance at the chart reveals that the decline in water usage per customer is much steeper since
the late 1980s than before. Notice that average consumption was even higher in some years of
the late 1980s and early 1990s than in the mid-1980s. A simple trend regression fitted over the
1988 to 2010 period shows an annual average decline of 0.24 MCF (1,771 gallons) per customer.
A trend fitted over the longer period, 1978 to 2010, shows an annual average decline of 0.16
MCF (1,169 gallons) per customer.

It is beyond the scope of this project to determine precisely what caused the decline in each time
period, but clearly most of the decline has occurred in the last twenty years. We know from
research that the decline in water usage per customer has been driven by the penetration of low-
flow fixtures and appliances, the steady decline in the number of persons per household, and
other possible factors such as a reduction of leaks or consumers’ response to higher water prices.
Year-to-year fluctuations around the trend in usage are a function of weather, with very dry (wet)





MFSG 5-2 Cleveland Division of Water


summer conditions leading to very high (low) water usage, as people iincrease
ncrease or decrease
watering of their landscapes and lawns.

5.2.1 Demographic Factors

The average household size has been declining for many decades, as can be seen in Exhibit 5.2,
with the sharpest drop occurring in the 1970s.

Exhibit 5.2 - Average Number of Persons per Household, Cleveland Region


























































Source of raw data: US Census Bureau. Region is a weighted average calculated over seven counties: Cuyahoga,
Geauga, Lake, Lorain, Medina, Portage, Summit.

We calculated the household size using detailed county data from the decennial (ten-year)
censuses and the 2008 American Community Survey, with interpola
interpolation for years between the
data sets.. The primary reasons for the decline have been fewer children per family, delayed
family formation by baby boomers, divorces resulting in two households for the impacted
family, and rising life expectancy allowing many older persons to live as couples or widow(er)s
into their 70s and 80s. The decline in household size in Cleveland is similar to that for the United
States. However, household size is unlikely to fall much more, as there are presumably economic
(houses are expensive and are more efficiently used with multiple residents) and social (families
have children) floors
oors that we are approaching.

Indeed, the decline in household size is responsible for much of the housing boom seen over the
past few decades, leading to more residential water customer accounts – as shown in red in
Exhibit 5.1.. The seven counties in the Cleveland region added 189,000 households between 1970
and 2008, even as the number of persons living in households fell by 227,000. The central
county, Cuyahoga, lost both households (20,000) and population ((441,000)
441,000) over the period;
p

MFSG 5-3 Cleveland Division of Water


however, clearly Cuyahoga would have lost many more households had the average number of
residents not fallen dramatically (from 3.06 to 2.35 persons). County-level details from the last
four decennial censuses and the 2008 American Community Survey are provided in Table 5.1.

Table 5.1 - Changes in Household Size, Cleveland Region by County


1970 1980 1990 2000 2008
Average Household Size
Cuyahoga 3.06 2.62 2.46 2.39 2.35
Geauga 3.68 3.23 2.98 2.84 2.77
Lake 3.50 2.93 2.65 2.50 2.51
Lorain 3.45 2.98 2.76 2.61 2.61
Medina 3.54 3.12 2.90 2.74 2.64
Portage 3.45 2.93 2.72 2.56 2.43
Summit 3.16 2.72 2.64 2.53 2.41
Weighted average 3.17 2.74 2.58 2.48 2.43
Number of Households
Cuyahoga 554,239 563,478 563,243 571,457 534,705
Geauga 16,941 22,880 26,906 31,630 33,730
Lake 55,801 72,064 80,421 89,700 92,041
Lorain 73,087 90,819 96,064 105,836 112,294
Medina 23,157 35,979 41,792 54,542 64,388
Portage 33,555 44,214 49,229 56,449 59,968
Summit 172,789 189,850 199,998 217,788 221,763
Total - 7 counties 929,569 1,019,284 1,057,653 1,127,402 1,118,889
Household Population
Cuyahoga 1,695,971 1,476,312 1,387,831 1,363,496 1,254,853
Geauga 62,343 73,902 80,288 89,861 93,365
Lake 195,304 211,148 213,276 224,609 231,469
Lorain 252,150 270,641 265,137 276,232 293,260
Medina 81,976 112,254 121,074 149,576 170,179
Portage 115,765 129,547 133,808 144,509 145,744
Summit 546,013 516,392 527,651 550,295 534,036
Total - 7 counties 2,949,522 2,790,196 2,729,064 2,798,578 2,722,906

So, the decline in the number of people per household has contributed to the decline in water
usage per customer, but other factors must also be important, given that the steepest drop in
water usage occurred after household size had seen its greatest decline.

5.1.2 Economic Factors

Complicating matters further, some factors tend to increase average water usage. Increased
household incomes lead to more water-using appliances, more landscaping, and hence more
outdoor irrigation systems. Larger and more expensive homes use more water than smaller and
older homes, after controlling for demographic makeup. The expanding layer of large expensive
homes in the market increases the average demand for water, but this is more than offset by
overall declines in water demand due to low-flow appliances and fixtures and fewer residents per
home. Clearly the factors leading to more water consumption per household are not enough to
offset the negative factors.

MFSG 5-4 Cleveland Division of Water


5.1.3 Price Elasticity

Cleveland has increased water rates several times over the history analyzed, including increases
of between 3 and 10% annually the last several years. However, those consumption rate
increases apply only to the water usage and not to the base service charge. Customers pay a
$7.00 fee quarterly to obtain water service, and this has not changed since it was put in place in
2007. Moreover, customers pay a different rate on the first MCF of water used quarterly, and a
higher rate for any amount over the first MCF of water consumption. We have calculated a
prototype quarterly bill for a customer using 2 MCFs in a quarter, taking account of the service
fee, and revealing the effective increase in the consumer’s bill for the last few years. Table 5.2
shows that the increase in the customer’s actual bill rose between 36% and 5% over the period,
depending upon place of residence. The significant percentage increase in 2007 bills is due
primarily to the implementation of the fixed quarterly customer service charge. Table 5.2 is
presented as a sample of the impact of raising rates on bills.

Table 5.2 - Estimated Quarterly Water Bill for Customer Using 2 MCFs
2006 2007 2008 2009 2010
Cleveland $27.33 $37.19 $40.36 43.37 46.48
Bill Increase 36.08% 8.52% 7.46% 7.17%

Low / 1st High $48.58 $58.32 $62.04 $65.19 $68.20


Bill Increase 20.05% 6.38% 5.08% 4.62%

2nd High $56.84 $65.87 $70.39 $74.28 $78.06


Bill Increase 15.89% 6.86% 5.53% 5.09%

3rd High $65.66 $74.63 $79.72 $84.10 $88.32


Bill Increase 13.66% 6.82% 5.49% 5.02%

The literature suggests that consumers are somewhat sensitive to water price increases,
particularly for large increases. The subject is covered fairly extensively in Chapter 9 of
Forecasting Urban Water Demand (2008) by R. Bruce Billings and Clive V. Jones. They
summarize a large literature, and suggest a consensus default price elasticity of -0.4. That is, a
10% increase in the marginal price of water leads to a 4% decline in water demand per average
customer. This may be too elastic for Cleveland, given the recommended adjustments for colder
climates. Billings and Jones (p. 165) recommend an adjustment to -0.2 in cases of wet or cold
climates. They also point out that low-income households are more sensitive to price increases
than high-income households, suggesting differential price elasticity impacts throughout the
Cleveland service region.

Price elasticities are defined in terms of relative prices – the price of water relative to the price of
other goods and services. Thus, if nominal water rates are rising at the same rate as prices overall
there is no real price increase, and no (price) reason for households to substitute away from water
consumption. We do not have precise information on the overall cost of living in Cleveland, but
generally over the last few years the national rate of consumer inflation has been in the 2-3%
range per year. This implies that real water rates have been rising by about 2-6% in real terms in
Cleveland. Applying a price elasticity of -0.2 implies a consumer reduction in water usage of 0.6
to 1.8% annually in response to the higher quarterly bills.

MFSG 5-5 Cleveland Division of Water


5.1.4 Low-Flow Appliances and Plumbing Fixtures

Finally, we consider the impact of the steady installation of low-flow water appliances in new
and older homes. Beginning in 1994, federal law required manufacturers to make appliances that
use much less water than previously. Homes built since the mid-1990s presumably have only
low-flow appliances. Also, much of the housing stock that is older than fifteen years and has
been remodeled, and thus they have been equipped with low-flow toilets, showerheads, and
clothes washers. As best we can determine there have been no studies of the penetration of low-
flow appliances in the Cleveland market. Thus, we need to refer to studies of other markets and
make some assumptions to assign a value to the impact of low-flow appliances on declining
water usage in the Cleveland system. Fortunately, for purposes of this study, we do not need to
know the inventory of water appliances in Cleveland. Since our water forecasting horizon is only
five years we only need to know how much the installation of these appliances will contribute to
falling average water use over this short period.

There is a growing body of research on the changing inventory of water using appliances in
households around North America. The most comprehensive and authoritative study is the
Residential End Uses of Water, or REUWS, published by the AWWA Research Foundation in
19992. The REUWS installed data loggers on 1,188 randomly selected homes in twelve cities
between May 1996 and March 1998. The data loggers recorded water usage in ten second
intervals, and flow signature software was used to determine how the water was being used
inside the home. Mail surveys were used to gather demographic, housing, and economic
information at each address. By combining the information, researchers were able to observe
how different types of households used water throughout the day. Moreover, researchers could
detect what kinds of water appliances were being used and how much water was consumed for
each activity. In particular, REUWS provided a snapshot of the penetration rate and water usage
of low-flow appliances in these households.

Fortunately, an updated end use study3 was conducted in one of the REUWS cities and we can
use the difference in results to make useful inferences about how the penetration rate is changing
annually. One hundred randomly selected homes in Denver were logged in 1996, and these same
homes were logged again in 2005. The researchers found that there was an 11.0% reduction in
average indoor water consumption over the nine years, and that 7.4% of that was due to the
increased penetration and use of low-flow appliances. Fewer residents per household accounted
for the rest. This amounts to a 0.8% annual compound rate of decline in water usage per
customer due to more low-flow appliances over that period4. In Louisville, using similar





               


                   



                 
                 


MFSG 5-6 Cleveland Division of Water


methods, we estimated an annual decline of 0.56% annually due to the penetration of low-flow
appliances.

The accompanying Table 5.3 shows the age of the housing stock in the City of Cleveland,
Cuyahoga County, and the Cleveland MSA. Note that less than 5% of City and County housing
stock was built after EPA required low flow appliances in the mid-1990s. So most of the housing
stock will see further reductions in water usage as they are remodeled, replacing traditional
appliances with mandated low-flow appliances. Presumably, homes built after 1995 already have
low-flow appliances, but this is a very small percentage of the housing stock.

Table 5.3 - Cleveland Region Housing Stock


City of Cleveland Cugahoga County Cleveland MSA
Share of Share of Share of
Year Structure Built Number Number Number
Total Total Total
Built 2005 or later 1,083 0.5% 5,539 0.9% 16,210 1.7%
Built 2000 to 2004 5,031 2.3% 17,134 2.8% 44,696 4.7%
Built 1990 to 1999 4,054 1.9% 31,099 5.0% 77,826 8.2%
Built 1980 to 1989 3,316 1.5% 29,752 4.8% 58,862 6.2%
Built 1970 to 1979 9,461 4.4% 60,020 9.7% 117,403 12.4%
Built 1960 to 1969 13,516 6.3% 82,686 13.3% 122,627 13.0%
Built 1950 to 1959 25,732 11.9% 126,779 20.4% 179,564 19.0%
Built 1940 to 1949 27,785 12.9% 66,801 10.8% 84,146 8.9%

5.3 Residential Water Demand Projections Methodology


The following section outlines the methodology and approach used to develop the residential
customer and water consumption forecasts for the study period.

5.3.1 Population and Household Estimates

We sought to estimate the number of households in the Cleveland Water Division’s (CWD)
service area (most of Cuyahoga County and parts of Medina and Summit Counties for direct
metered service and the remainder of Cuyahoga County and a small portion of Geauga County
for master meter service) at a level of detail sufficient to distinguish between the City of
Cleveland, the individual suburbs and the four pressure zones, and to project our estimates out to
2015. Since Cleveland and a majority of the suburbs lie in two or more of the pressure districts,
a level of detail finer than official county subdivisions (cities and townships in Ohio) was
necessary. The census tract, which can vary in size depending on population density, but
generally consists of a number of contiguous blocks, is the next smallest area for which data is
regularly collected. Census tracts can have up to around 4,000 households and in Cuyahoga
County the average tract has about 1,100 households. An added benefit for this project is that
within Cuyahoga County no census tract crosses a city boundary.

Outside of the ten-year (decennial) census there are no estimates of households below the county
level of aggregation. Therefore it is necessary to begin with population estimates and translate

              


MFSG 5-7 Cleveland Division of Water


them into households later. The U.S. Census Bureau produces annual estimates of county and
county subdivision populations, but census tract level estimates are available only for the
decennial census years.

The first step in our estimation process was therefore to translate the Census Bureau’s 2001-08
county subdivision population estimates into census tract level estimates. For the years 2001-05
we simply used each tract's share of the appropriate county subdivision in the 2000 Census. For
example, each tract in Parma was apportioned a population according to its share of the 2000
population of Parma rather than its share of Cuyahoga County. This assumes the population
distribution within each city or township remained constant, an assumption made largely because
there is no readily available database that would allow one to gauge population shifts at such a
fine level of geographic detail.

However, for 2006-08 such a database is available. The U.S. Department of Housing and Urban
Development (HUD) has entered into an agreement with the United States Postal Service
(USPS) to receive quarterly aggregate data on addresses identified by the USPS. HUD makes
this data publicly available at the census tract level. This data makes it possible to construct a
quarterly series by census tract of addresses in service (and assumed occupied). This data is a bit
noisy (seemingly over or under estimating the households in certain tracts, on occasion a quarter
of data for a tract is anomalous with the rest of the series) but it does give a good indication of
the general trend in an area. For 2006-08 we adjusted each census tract’s share of its county
subdivision’s population according to the changes in occupied addresses in the USPS
administrative database that is available from HUD.

The next step in the process was to estimate average household size and number of households
by census tract for 2005-08. We began by examining recent county level data from the
American Community Survey (ACS). Since this data is subject to error, and estimated values
can fluctuate from year to year based solely on survey error, we looked at the single year results
from 2005 through 2008 and the three-year aggregates 2005-07 and 2006-08. From this
information we arrived at a reasonable estimate of the “true” county level average household size
for 2008 and assumed a constant rate of change from 2000 to fill in 2005-07. With the county
level household size and population estimates in hand, we simply divided the former into the
latter to get county level estimated households for 2005-08.

With county level estimates of household size and number of households for 2005-08, we then
derived census tract level estimates for those years. To do so, we started with the tract level
address in service numbers from the USPS administrative data as our initial household estimates
and adjusted each tract so that the ratio of that tract's household size to the county's average
household size is consistent with the ratios from the 1990 and 2000 Censuses and fairly level
over the four years estimated. A further constraint to the adjustments is that the sum of the
estimated households in each tract must equal the county total that we previously estimated.

With the census tract level estimates of population and households brought forward to 2008, the
next step was estimating population by tract for 2009-15. We once again begin at the county
level, assuming that the 2008-09 annual change and the 2009-10 annual change will be at the
same rate as the 2007 to 2008 annual change. For the 2010 to 2015 projections, we assume that

MFSG 5-8 Cleveland Division of Water


change will occur at the rates forecast for each county in the five-year population projections
(2005-2030) published in October 2003 by the Office of Policy Research and Strategic Planning
of the Ohio Department of Development. To translate these county estimates to the tract level,
we applied the change in occupied addresses in the USPS administrative data from 2008-09 as a
starting point for the 2009 estimates and applied the average 2007-09 rate of change as the
starting point for our estimates of the 2009-10 changes. These tract level initial estimates are
adjusted so that they sum to the previously estimated county total. For the 2011 to 2015
projections the initial tract estimates were based on the 2008-10 rate of change of the county
subdivision each census tract is a part of. These initial estimates were also adjusted so that the
total of all the tracts in a county equaled the county level estimate.

In order to turn these population estimates into households we needed to estimate household size
for 2009-15. We began once more at the county level. Household size has been declining over
time and we sought a model that would best capture this trend. We used a double-log (or log-
linear or constant elasticity model) model of county level household size against time. The
equation used in the analysis is shown below.

ln Y = b1 + b2 * ln X

Where: Y = household size


X = 1, 2, …, 19 (for the time periods 1990-2008)

Each county was regressed individually. This is an exponential model of decreasing rates of
change over time, which is what has been observed in the data. There is ample reason to believe
that changes in household size will continue to be smaller and smaller over time and that they are
nearing a natural bottom (which will vary from place to place depending upon various
socioeconomic factors that should not change too much in the short term). From the regression
results we produced county level household size estimates for 2009-15. Census tract level
household size estimates were created by simply applying the 2008 ratio of tract level household
size to county level household size (that is, assuming that the relation between a tract’s
household size and the overall county average household size remains constant in the forecast
period). Tract level estimates of the number of households 2009-15 were then straightforward
(population divided by household size for each census tract).

5.3.2 Water Usage Estimates

The CWD provided us with customer usage data for all residential and commercial accounts for
the years 2007, 2008, and 2009. Using geographic information system (GIS) software we were
able to match the majority of the addresses in the usage database with their census tracts. We
then aggregated residential water usage to the census tract level, by year (2007-09), and
calculated average water usage per account by tract. This became the dependent variable in
subsequent regression models. The independent variables included in the analysis include the
following:

• Average May to October temperatures by year


• Total May to October precipitation by year

MFSG 5-9 Cleveland Division of Water


• Median housing unit value (2000) by tract and
• Average household size (2000) by tract.

The weather variables were chosen to help isolate the effects of outdoor water usage in the
warmest months. Housing value was chosen because studies have shown that water usage
increases with income and housing size. Household size was chosen because more people in a
household should translate into greater water usage, all other things being equal.

The CWD’s usage database is set up well for billing purposes, but has a number of deficiencies
in terms of being able to accurately differentiate residential from commercial customers.
Because the estimates of future change in water usage are linked to the changes in households by
tract, it was necessary to adjust the average water usage by tract in several different ways in
order to best estimate the actual usage in 2007 and 2008. Generally, this involved adjusting the
number of accounts in a census tract (thus changing the tract average usage) to take into account
the inclusion of small commercial businesses in the residential customer category and the
exclusion of larger multifamily buildings from the residential customer category.

Eventually two different regression equations were chosen, one for the city of Cleveland and the
other for all the direct service suburbs. These were chosen based on their relative success in
estimating actual water consumption in 2007 and 2008.

In applying the regression equations to the data we also incorporated an estimate for the real rate
of change in the median housing unit value and an annual effect for the impact of conservation
measures. The former is a proxy for growing affluence in the region and the spread of water
using amenities down the socioeconomic ladder, and the latter is a proxy for the spread of low
flow appliances and fixtures and water saving habits. For the real growth rate of housing value
we used the 1990-2009 average real compound growth rate for the Cleveland metro area. To
model the conservation impact we used the rate we estimated in Louisville based on surveys of
the 60 houses that were part of a data logging experiment in 2008. It is slightly less than the rate
to come out of the longitudinal study of 100+ houses in Denver, but produced better estimates of
the 2007 and 2008 water usage.

Pressure districts and census tracts do not coincide, so in cases where a tract is in two or more
pressure districts we partitioned the estimated usage according to the percentage of the tract's
residential accounts in each district.

5.3.3 Price Elasticity Analysis

As mentioned above, one of the reasons for the declining water consumption in the region is due
to customers responses to increases in their utility bills. We estimate that the ongoing increases
in rates in the region will continue to impact customer usage. To assess the impact of bill
increases it is important to consider the total utility bill that customers receive, since the CWD
sends out a combined utility bill that includes water charges and sewer charges. A customer in
the City of Cleveland receives a bill with charges from CWD, sewage collection charges from
the Cleveland Division of Water Pollution Control (WPC) and sewage treatment charges from
the Northeast Ohio Regional Sewer District (NEORSD). The majority of customers located in

MFSG 5-10 Cleveland Division of Water


the Direct Service Suburbs receive a bill with charges from CWD and NEORSD. Table 5.4
presents the estimated increases in rates over the study period for each entity.

Table 5.4 - Estimated Utility Rate Increases


Entity 2010 (1) 2011 2012 2013 2014 2015
(2)
Cleveland Division of Water 5% 6% 6% 6% 6% 6%
Cleveland Division of Water
12% 13% 13% 13% 13% 7%
Pollution Control
Northeast Ohio Regional
9% 13% 13% 13% 13% 13%
Sewer District(3)
(1)
Represents actual rate increases from 2009 to 2010.
(2)
Represents average rate increase, rates differing depending on rate district
(3)
Represents projected increases based on 2010 rate study

As mentioned above, price elasticity is calculated based on the actual increase in the customer
bill net of inflation. To assess the impact of the rate increases presented in Table 5.4 bills were
calculated for each class of customer assuming a standard customer usage of 2 MCF per quarter
and an elasticity coefficient of -0.02. The resulting demand factor impact of the analysis is
shown in Table 5.5.

Table 5.5 - Price Elasticity Demand Impacts


2011 2012 2013 2014 2015
Cleveland -1.75% -4.37% -1.64% -1.53% -1.44%
Direct Service Suburbs
Low -1.00% -3.38% -0.95% -0.87% -0.80%
1st High -1.00% -3.38% -0.94% -0.87% -0.80%
2nd High -0.80% -3.49% -1.10% -1.04% -0.98%
3rd High -0.63% -3.23% -0.82% -0.75% -0.79%
Master Meter Communities
Bedford 0.00% 0.00% -0.71% -0.65% -0.60%
Chagrin Falls 0.00% 0.00% -0.61% -0.56% -0.59%
Cleveland Heights 0.00% 0.00% -0.83% -0.78% -0.74%
Lakewood 0.00% 0.00% 0.00% -0.65% -0.60%
Geauga County 0.00% 0.00% 0.00% 0.00% -0.59%

Table 5.5 demonstrates anticipated annual reduction in water demand due to price increases.
The reason for the significant reduction in 2012 is due to the fact that this will be the first
full year of adjustments from current rates. In 2011 the rates are proposed to adjust mid-year
providing customers with a half-year with no increases in rates. It should be noted that CWD’s
current agreements with master meter communities limit the increases in rates to these
communities to 75% of the rate increase in associated service district for which they are served.
Therefore the master meter elasticity impacts are adjusted accordingly. Additionally it is
anticipated that due to the cost of service analysis that a number of the master meter community
rates will not change resulting in no change due to price elasticity.

MFSG 5-11 Cleveland Division of Water


5.4 Residential Customer and Water Demand Forecasts
5.4.1 Customer Account Forecast

We forecast that CWD will experience a loss of about three percent of residential customer
accounts within the City of Cleveland by 2015. The change in residential customer accounts in
the direct service suburbs will vary by pressure district. We forecast that Low rate district will
experience customer loss at nearly the same rate as the City of Cleveland, while 1st High and 3rd
High rate districts will actually see an increase in residential customers between 2011 and 2015.
In between, we forecast that 2nd High rate district will lose around half a percent of residential
customers. Tables 5.6 and 5.7 present the forecast of residential water customer accounts over
the study period.

Table 5.6 - Residential Customer Account Forecast - Percent Change from Previous Year
Cumulative
2011 2012 2013 2014 2015
Change
Cleveland -0.60% -0.60% -0.61% -0.62% -0.62% -3.05%
Direct Service Suburbs
Low -0.50% -0.50% -0.51% -0.51% -0.52% -2.54%
1st High 0.03% 0.04% 0.05% 0.05% 0.06% 0.23%
2nd High -0.09% -0.10% -0.10% -0.10% -0.11% -0.50%
3rd High 0.33% 0.33% 0.32% 0.32% 0.31% 1.61%

Table 5.7 - Residential Customer Account Forecast - Number of Customer Accounts


Cumulative
2011 2012 2013 2014 2015
Change
Cleveland 118,832 118,119 117,398 116,670 115,947 (2,884)
Direct Service Suburbs
Low 25,873 25,743 25,612 25,481 25,349 (524)
1st High 53,243 53,264 53,291 53,317 53,349 107
2nd High 120,713 120,592 120,472 120,351 120,219 (494)
3rd High 81,786 82,056 82,318 82,582 82,838 1,052
Total Accounts 400,446 399,774 399,091 398,402 397,701 (3,375)

While the projections were done before the recession and may be a bit optimistic, the exodus
from Cuyahoga County peaked in 2005-06 and dropped much closer to the average rate of
change in the 2003 predictions during 2007-08. The 2003 predictions for 2005 and 2010
population were very good for the other counties in the region. So we decided to use the 2010-
15 rate of change in the 2003 projections for the county level forecasts. If we had used a more
pessimistic rate, the customer forecasts would have dropped a bit across the board (but less for
3rd High since much of that is outside Cuyahoga County).

Table 5.8 presents all of the direct service communities currently served by CWD and identifies
the rate district in which each community is located.

MFSG 5-12 Cleveland Division of Water


Table 5.8 - Communities and Locations Served by CWD
Pressure District
Community
Low 1st High 2nd High 3rd High
Bay Village x
Beachwood x
Bedford Heights x
Bentleyville x x
Boston Heights x
Bratenahl x
Brecksville x x
Broadview Heights x
Brooklyn Heights x
Brooklyn Village x
Brook Park x x
Brunswick x
Brunswick Hills Township x
Cleveland x x x
Cuyahoga Heights x
East Cleveland x x x
Euclid x x x
Fairview Park x
Garfield Heights x x
Gates Mills x
Glenwillow x
Highland Heights x x
Highland Hills x
Hinckley Township x
Hudson x
Hunting Valley x
Independence x x x
Linndale x
Lyndhurst x x
Macedonia x
Maple Heights x
Mayfield Heights x
Mayfield Village x x
Middleburg Heights x x
Moreland Hills x
Newburgh Heights x
North Olmsted x
North Randall x x
North Royalton x x
Northfield x
Northfield Center Township x
Oakwood x x
Olmsted Falls x
Olmsted Township x
Orange Village x
Parma x x x
Parma Heights x
Pepper Pike x
Reminderville x
Richfield x

MFSG 5-13 Cleveland Division of Water


Pressure District
Community st
Low 1 High 2nd High 3rd High
Richmond Heights x
Rocky River x x
Seven Hills x x x
Shaker Heights x x
Solon x x
South Euclid x
Strongsville x x
Twinsburg x
Twinsburg Township x
University Heights x x
Valley View x x
Walton Hills x
Warrensville Heights x x
Westlake x x
Woodmere x

The map shown in Exhibit 5.3, demonstrates that the population of the CWD service area will be
shifting to the far south and east, to the west, and northeast near the lake. Most of the far south
and east areas are in 3rd High pressure district and most of the west and northeast areas are in 1st
High pressure district.

MFSG 5-14 Cleveland Division of Water


Exhibit 5.3 - Percent Change in Residential Customers

5.4.2 Water Demand Forecast

The forecast for residential demand follow along the lines of the customer forecast but are more
pronounced due to price elasticity factors that do not impact change in customer accounts.
Cleveland and all of the suburban pressure districts are expected to have reduced water
consumption, with bigger decreases than forecast for number of customer accounts, due to the
impact of conservation being greater than growing affluence and the trickle down of water
amenities. We forecast that there will be a drop in demand within the City of Cleveland of 17%
by 2015. Demand change in the direct service suburbs will vary by pressure zone. We forecast
that Low service will experience a demand loss of 12%, while 3rd High service district will only
see a decrease in demand of about 7% between 2010 and 2015. In between, we forecast that
demand in 2nd High service district will drop by about 10%, while demand in 1st High service
district will be roughly 9%. Tables 5.9 and 5.10 present the residential water consumption
demand forecast for the study period.

MFSG 5-15 Cleveland Division of Water


Table 5.9 - Residential Water Demand Forecast - Percent Change from Previous Year
Cumulative
2011 2012 2013 2014 2015
Change
Cleveland -3.05% -5.67% -2.94% -2.84% -2.75% -17.25%
Direct Service Suburbs
Low -1.97% -4.35% -1.92% -1.84% -1.77% -11.85%
1st High -1.20% -3.88% -1.49% -1.41% -1.34% -9.32%
2nd High -1.35% -4.05% -1.66% -1.59% -1.53% -10.18%
3rd High -0.77% -3.37% -0.96% -0.88% -0.91% -6.89%

Table 5.10 - Residential Water Demand Forecast - Billable Quantities of Water


Cumulative
(MCFs) 2011 2012 2013 2014 2015
Change
Cleveland 996,730 940,203 912,590 886,698 862,327 (134,403)
Direct Service Suburbs
Low 164,049 156,914 153,904 151,074 148,400 (15,650)
1st High 393,009 377,755 372,137 366,899 361,984 (31,025)
2nd High 827,526 794,038 780,881 768,483 756,726 (70,800)
3rd High 605,569 585,157 579,554 574,461 569,215 (36,353)
Total Quantities 2,986,883 2,854,067 2,799,067 2,747,614 2,698,652 (288,232)

As can be seen in the accompanying map (Exhibit 5.4) of water demand changes, most of the
CWD service area is forecast to experience a drop in water demand between now and 2015. The
exceptions are mostly in Medina and Summit counties plus scattered areas in the far west and
east of Cuyahoga County, most notably Olmsted Township, and the villages of Highland Hills,
Oakwood and Glenwillow.

MFSG 5-16 Cleveland Division of Water


Exhibit 5.4 - Percent Change in Residential Water Demand

MFSG 5-17 Cleveland Division of Water


The total number of residential customer accounts and the usage per account forecasts compared
to the historical accounts and usage per account are shown in Exhibit 5.5.

Exhibit 5.5 - CWD Residential Customers and Average Water Usage per Customer Forecast

15 410,000

Water Usage per Customer


14 400,000

Customers
390,000
13

380,000
12
370,000

# of customers
MCF per year

11
360,000
10
350,000
9
340,000

8
330,000

7 320,000

6 310,000

5.5 Commercial Customer and Water Demand Forecasts


The number of commercial customers has been growing slightly, despite a decline in the number
of business establishments, jobs, population, and households in the service area. See Table 5.11.
We are unsure why there is such a disconnect between the number of water customers and the
demand drivers. One hypothesis is that Cuyahoga County has lost a number of major employers
- business establishments that once had thousands of employees each - while gaining some small
personal service and retail establishments that employee only a few people each. This may be
true, but it is an assumption that is not supported by the summary economic and demographic
data. The sheer number of business establishments in the County fell by 6.5% between 1998 and
2007, while the number of commercial accounts grew by 18.2%. Meanwhile the number of jobs
in the County fell by 3.4% and the population of the County fell by 7.9% during that same time
period. It is true that the number of jobs grew slightly in the service industries – defined here to
be total private sector employment minus manufacturing, construction, and agriculture. So, one
(almost) logically consistent story is that the County has been adding small shops and offices that

MFSG 5-18 Cleveland Division of Water


sell services to commuters and nonresidents. Table 5.11 presents the comparison of CWD
commercial accounts and economic data for Cuyahoga County.

Table 5.11 - CWD Commercial Water Accounts and Economic Data for Cuyahoga County
Number of Number
Number of
Commercial Number of Jobs, Number of
Year Business Population(3)
Water (1) of Jobs(2) Service Households(3)
Establishments
Accounts Sector(2)
1998 13,128 35,866 957,208 670,297 1,405,644 569,805
1999 13,555 38,447 968,263 683,338 1,399,752 570,630
2000 13,965 38,206 974,228 688,732 1,392,111 571,457
2001 14,331 37,897 954,048 696,023 1,381,701 566,728
2002 14,628 37,337 931,227 684,774 1,369,638 562,039
2003 14,748 37,170 921,424 680,909 1,356,396 557,388
2004 14,779 37,192 924,114 686,480 1,342,569 552,776
2005 15,110 36,990 922,917 690,128 1,325,424 548,202
2006 14,937 36,579 926,545 694,912 1,307,936 543,665
2007 15,515 36,045 924,294 695,046 1,295,187 539,167
2008 14,876 1,283,925 534,705
(1)
US Census Bureau, County Business Patterns
(2)
US Bureau of Economic Analysis, with service sector defined as total private sector jobs minus agriculture,
construction and manufacturing
(3)
US Census Bureau, with household estimated interpolated between 1990 and 2000, and between 2000 and 2008

Without better information, there is no logical basis for forecasting continued growth in
commercial customers; hence, we forecast a constant number (14,287) over the next five years.
Water usage per commercial customer has been falling steadily for at least thirty years, between
3.5% and 4.0% per year, compounded. We fit a logarithmic time trend and forecast continued
decline. Multiplying the number of customers times the average annual usage per customer
yields the commercial water forecast for the study period shown in Table 5.12.

Table 5.12 - Commercial Water Consumption Demand Forecast


Cumulative
(MCFs) 2011 2012 2013 2014 2015
Change
Commercial Accounts 14,287 14,287 14,287 14,287 14,287 0
% Change 0% 0% 0% 0% 0% 0%

Commercial Usage 2,381,974 2,290,268 2,202,093 2,117,312 2,035,796 (346,178)


Percent Change -3.85% -3.85% -3.85% -3.85% -3.85% -19.25%

MFSG 5-19 Cleveland Division of Water


Exhibit 5.6 presents the historical and projected number of customer accounts and usage per
account for commercial customers.

Exhibit 5.6 - Commercial Customer Accounts and Average Usage per Account
650 18,000

600
16,000

550
Customers
14,000
500

12,000
450

# of customers
MCF per year

400 10,000

Water Usage per Customer


350 8,000

300
6,000

250
4,000
200

2,000
150

100 0

5.6 Master Meter Water Demand Forecasts


The water demand forecasts for the Master Meter Communities were developed using the same
methodology as the residential demands, at a census tract level. Future demand in the master
meter suburbs is forecasted to vary greatly by location. The forecasted demands for each Master
Meter Community are shown in Tables 5.13 and 5.14.

Table 5.13 - Master Meter Demand Forecast - Percent Change from Previous Year
Cumulative
2011 2012 2013 2014 2015
Change
Bedford -1.08% -1.08% -1.08% -1.08% -1.08% -5.40%
Chagrin Falls 0.64% 0.64% 0.64% 0.64% 0.64% 3.21%
Cleveland Heights -0.55% -0.55% -0.55% -0.55% -0.56% -2.77%
Lakewood -1.10% -1.10% -1.10% -1.10% -1.10% -5.51%
Geauga County -0.34% -0.35% -0.35% -0.35% -0.36% -1.75%

MFSG 5-20 Cleveland Division of Water


Table 5.14 - Master Meter Demand Forecast - Billable Quantities of Water
Cumulative
(MCFs) 2011 2012 2013 2014 2015
Change
Bedford 95,622 94,590 93,570 92,560 91,561 (4,061)
Chagrin Falls 26,768 26,940 27,113 27,286 27,461 693
Cleveland Heights 286,458 284,876 283,301 281,732 280,168 (6,290)
Lakewood 260,933 258,060 255,218 252,406 249,623 (11,310)
Geauga County 13,586 13,539 13,491 13,444 13,395 (191)
Total Quantities 683,367 678,006 672,693 667,428 662,208 (21,159)

Tables 5.13 and 5.14 show that water demand in the master meter communities is forecasted to
decline over the study period. The most significant percentage decline is forecasted to occur in
Lakewood, with a cumulative reduction in water sales of 5.5% followed closely by Bedford at
5.4%. However, in terms of total water sales volume Lakewood is forecasted to experience the
most significant decline in water consumption. Chagrin Falls is forecasted to experience a
modest decline in consumption at 4.6% cumulatively over the study period.

5.7 Conclusion
Based on our analysis we project that CWD will continue to experience declining water sales
over the study period. A number of factors are contributing to the declines in consumption. The
primary factors impacting residential consumption are the continued reduction in the household
size, the ongoing replacement of water fixtures and appliances with low flow fixtures and
appliances, increases in water and sewer bills and general economic factors. The factors leading
to declining commercial consumption continue to be more efficient use of water through
recycling, changes in the type of commercial activity in the region (shift from manufacturing to
service based industries) and the impact of the overall economic conditions. The projected
continued decline in water consumption over the study period will need to be addressed in the
financial plan as the billable quantities of water, which serve as the majority of the basis for
CWD revenues, will produce reduced revenues. Table 5.15 presents an aggregate summary of
the total CWD system customer and water consumption forecast.

Table 5.15 - Total System Customer Account and Consumption Demand Forecast
Cumulative
(MCFs) 2011 2012 2013 2014 2015
Change
Accounts
Number of Accounts 414,733 414,061 413,378 412,689 411,989 (2,744)
Change in Total
-0.16% -0.16% -0.16% -0.17% -0.17% -0.66%
Accounts
Water Demand (MCFs)
Billable Quantities 6,052,225 5,822,340 5,673,853 5,532,355 5,396,656 (655,569)
Change in Total
-2.52% -3.80% -2.55% -2.49% -2.45% -13.81%
Demand

MFSG 5-21 Cleveland Division of Water


6.0 CURRENT AND FUTURE REVENUES WITH EXISTING RATES

6.1 Approach
This chapter of the report provides an economic analysis of the recent revenues generated by
CWD and determines the adequacy of existing water rates and fees to fund future revenue
requirements described in Section 3 of the report. The adequacy of the revenues is evaluated by
calculating the annual cash surplus or shortfall that will result with the continued use of the
current rates and fees. The assumptions used to develop the forecasted revenues and the metrics
used to evaluate the ability of CWD to continue to operate under these rates are discussed in this
section.

6.2 Historical and Existing Rates


CWD bills all City of Cleveland customers and Direct Service Suburb customers a quarterly
customer service charge plus a consumption charge for metered water. The consumption charges
are structured such that the 1st MCF of water used is billed at a lower lifeline rate and additional
MCFs are billed at a higher rate. CWD also provides a Homestead discount rate for customers
that meet age and income requirements. Over the last four years, CWD has implemented annual
rate increases in the consumption charge based on the financial plan developed in 2005. Table
6.1 shows the rate schedule in detail for City of Cleveland and Direct Service Suburb customers
over the last three years including the rates currently in place.

Table 6.1 - City of Cleveland and Direct Service Suburb Historical and Existing Rates (2010)
2010 (Existing
Rate District Usage Block 2008 Rates 2009 Rates
Rates)
Quarterly
All Customers Customer Service $7.00 $7.00 $7.00
Charge
Cleveland
Regular 1st MCF $10.63 $11.59 $12.58
Additional MCFs $22.73 $24.78 $26.90
Homestead All MCFs $4.72 $5.15 $5.59
Direct Service
Suburbs
Low/1st High
Service
Regular 1st MCF $17.54 $18.54 $19.50
Additional MCFs $37.50 $39.65 $41.70
Homestead All MCFs $7.79 $8.24 $8.66
2nd High Service
Regular 1st MCF $20.20 $21.44 $22.64
Additional MCFs $43.19 $45.84 $48.42
Homestead All MCFs $8.97 $9.53 $10.06
3rd High Service
Regular 1st MCF $23.17 $24.57 $25.91
Additional MCFs $49.55 $52.53 $55.41
Homestead All MCFs $10.29 $10.92 $11.52

MFSG 6-1 Cleveland Division of Water


CWD has a separately negotiated rate with East Cleveland that applies until it is phased into the
Direct Service Suburbs rate schedule after 2012. The historical and current rates for East
Cleveland are shown in Table 6.2.

Table 6.2 - East Cleveland Historical and Existing Rates (2010)


Rate District Usage Block 2008 Rates 2009 Rates 2010 (Existing Rates)
Quarterly
East Cleveland Customer Service $7.00 $7.00 $7.00
Charge
Low/1st High
Service
Regular 1st MCF $27.00 $27.00 $27.00
Additional MCFs $46.00 $46.00 $46.00
Homestead All MCFs $27.00 $25.00 $23.00
2nd High Service
Regular 1st MCF $32.00 $31.00 $30.00
Additional MCFs $47.00 $48.00 $50.00
Homestead All MCFs $30.00 $27.00 $24.00

CWD also provides water service on a wholesale basis to Master Meter communities within the
greater Cleveland area. In addition, some suburban and county customers receive water from
CWD on an emergency standby basis. The historical and existing rates for Master Meter and
Emergency Standby customers are shown in Table 6.3. Master Meter and Emergency Standby
customers do not currently pay the quarterly customer service charge.

Table 6.3 - Master Meter Historical and Existing Rates (2010)


Master Meter
Usage Block 2008 Rates 2009 Rates 2010 (Existing Rates)
Customer
Bedford All MCFs $28.09 $29.84 $31.54
Chagrin Falls All MCFs $31.89 $33.86 $35.76
Cleveland Heights All MCFs $28.04 $29.79 $31.50
Lakewood All MCFs $24.33 $25.75 $27.10
Geauga County All MCFs $34.84 $36.81 $38.72
Emergency Standby
Berea All MCFs $33.33 $36.33 $39.44
Lake County All MCFs $32.41 $35.34 $38.36
Lorain County All MCFs $30.33 $36.33 $39.44
North Ridgeville All MCFs $26.54 $28.94 $31.41
Medina County All MCFs $38.63 $42.12 $45.72
Summit County All MCFs $38.63 $42.12 $45.72
Hudson County All MCFs $38.63 $42.12 $45.72
Portage County All MCFs $38.63 $42.12 $45.72

6.3 Economic Analysis of Recent Revenues


Tables 6.1, 6.2 and 6.3 demonstrate the rates that were in place and charged to users of the CWD
system over the last three years. The rates shown in the tables represent annual increases of
approximately 9% for Cleveland customers, about 6% for Direct Service customers and
approximately 7.5% for Master Meter customers. The tables show that the customer service
MFSG 6-2 Cleveland Division of Water
charge has remained the same over this period. Under the assumption that CWD were to sell the
same amount of water during each of the last three years, CWD should have experienced annual
increases in revenues from water sales (exclusive of the customer service charge) in the range of
7% due to the rate increases. This however has not been the case over the last two years (2009
and 2010). CWD has experienced significant reductions in revenues from water sales. It should
be noted that this is only the case with water sales, revenues from the customer service charge
have been fairly consistent over the last two years. Table 6.4 demonstrates the annual revenues
from the customer service charge and from water sales over the last three years.

Table 6.4 - Annual Revenues ($1,000’s)


2008 2009 2010
Customer Service Charge Revenues 11,683 11,363 11,533*
Water Sales Revenues 211,741 197,185 210,665*

Total Revenues $223,425 $208,548 $222,198


*Represents 11 months of actual data with the 12th month estimated.

Based on industry research most water utilities around the United States have experienced
declines in revenues over the last few years. The magnitude in the reductions in revenues have
ranged anywhere from 15% experienced by several utilities in the Midwest and the Northeast to
around a 3% reduction in the Southwest United States. The City of Akron, Ohio recently
increased water rates by 25% but has only experienced a 13% increase in revenues. Similarly,
the City of Atlanta increased rates by 12.5% but only experienced revenue increases of
approximately 8%. Limited research has been completed to assess the primary reason for the
decreases in revenues. In the case of Atlanta, the increases in rates were in addition to rates that
were already among the highest in the United States and it is believed that the limited increase in
revenues is largely due to price responses from customers (price elasticity). The reductions in
Akron also may be at least partially attributed to the magnitude of the rate increase. The City of
Phoenix (which has been significantly impacted by the economic recession) estimates that of its
reduction in revenues approximately 3% is attributed to recent economic conditions. In general
around the United States most utilities attribute a portion of reduced water sales due to a
movement to conserving resources and general conservation efforts. Unfortunately, a
comprehensive assessment of the impact of the national recession on water utilities has not been
completed but it is clear that the national recession is a contributing factor for recent declines in
water sales around the United States. Additionally, segregating the individual factors that have
contributed to water sales reductions is difficult.

To assess the potential reasons for the reductions in CWD water sales, it is helpful to provide a
sense for the magnitude of the reduction in revenues by determining the amount of revenue that
should have been generated from water sales in 2009 assuming flat (no change) in metered water
usage. The estimated revenue based on actual water usage data was also calculated (taking
actual water usage data times the rates in place during 2009). These two calculated revenues
were then compared with the actual water sales revenues as reported by in CWD financials
statements. The same analysis can be completed for 2010 assuming that 2009 actual
consumption was the same in 2010. Exhibit 6.1 demonstrates the anticipated revenues from

MFSG 6-3 Cleveland Division of Water


water sales assuming no change in usage and with actual water usage compared with actual
revenues.

Exhibit 6.1 - Water Sales Revenue Comparison ($1,000’s)

As shown in Exhibit 6.1, assuming CWD sold the same amount of water in 2009 as in 2008
water sales revenue should have been $219 million. Based on actual water usage data in 2009
water sales should have been $208 million. Based on actual financial results for 2009 the actual
water sales revenues were $197 million. Therefore the magnitude of the reduction in revenues in
2009 is approximately $21.9 million ($219 minus $197) or 10%. In 2010 assuming no change in
water sold from 2009 to 2010 (using actual 2009 water sales as a starting point), anticipated
water sales revenue is about $222 million. Based on actual water usage data in 2010 water sales
revenue should have been approximately $204 million. However unlike 2009, in 2010 the actual
revenues from water sales were higher at about $211 million. The possible reason for this result
in 2010 is discussed below.

Based on our review of CWD operations during 2009 and 2010, there are a number of reasons
for the overall reduction in water sales revenues. Specifically, we estimate that there are three
primary reasons for the reduction in revenues which include the following:

• Reductions in water sales due to demand factors (demographics, water conservation,


price elasticity, etc) as discussed in Chapter 5 of this report.

• Reductions in water sales due to the economic recession experienced during 2009 and
2010.

MFSG 6-4 Cleveland Division of Water


• Reductions in revenues due to issues related to the implementation of a new billing
system in the 3rd quarter of 2009.

Each of these items contributed to reduced revenues from water sales in 2009 and 2010. The
following sections provide a stepwise analysis of how much each factor contributed to the
reduction in revenues. The percentages and dollar amounts shown in the following sections refer
to the portion of reduced revenue (rather than the reduction from the total).

6.3.1 Demand Factors

As discussed in Chapters 4 and 5 of the report, CWD has experienced annual declines in water
sales over the past five years. Based on detailed demand analysis, the declines are anticipated to
continue into the future and are attributed to changing household size, replacement of water
using fixtures to higher efficiency fixtures, responses to rate increases (price elasticity) and
changes in the type of commercial customers located in the CWD service area. These factors
have resulted in average annual reductions in water sales of approximately 3%. If this
consumption reduction is applied to the 2008 water sales and used as a basis for 2009 the
revenues from water sales revenues are reduced by approximately $6.5 million, which represents
about 30% of the total reduction from anticipated revenues in 2009. Similarly if 2009 actual
water sales are reduced by 3% and used in 2010, the water sales revenues in 2010 are reduced by
$6.6 million.

6.3.2 Economic Conditions

The United States has experienced a significant national recession over the last three years. The
National Bureau of Economic Research (NBER) has pegged the start of the recession to
December 2007. Although the Gross Domestic Product (GDP) declined in the fourth quarter of
2007, it grew in the first two quarters of 2008 before declining again in the third quarter. The
NBER estimates that the recession ended in June of 2009 as the GDP demonstrated growth
beginning in the third quarter of 2009. Most economists agree with the NBER’s assessments of
the start and end of the recession but argue that the recovery from the recession and the impact
on various sectors of the economic has been and will continue to be protracted, impacting
economic activity significantly in 2010. Additionally the impact of economic recessions tends to
lag when it comes to public organizations like CWD.

The CWD service area has certainly not been spared from the impacts of the recession. The
recession has significantly impacted the housing market and reduced overall commercial activity.
These factors have had an impact on CWD water sales. As mentioned above while the recession
started in December of 2007, the impact appears to have been primarily demonstrated in 2009
and 2010. CWD did not experience a significant reduction in revenues in 2008. Water sales
were down 2.5% in 2008 which is consistent with the ongoing demand factors mentioned
previously.

In 2009 and 2010 the actual water usage reduced by more than the historical annual average of
3%. In 2009 water sold was down 4.7% from 2008 and in 2010 water sold was down an
additional 7.8% from 2009. It is assumed that the difference between the historical average

MFSG 6-5 Cleveland Division of Water


consumption reduction of 3% and the reductions experienced in 2009 and 2010 is due to the
economic recession. Therefore it is reasonable to estimate that in 2009 economic conditions
resulted in a reduction of approximately $3.6 million, which represents about 16% of the total
reduction in anticipated revenues. In 2010 economic conditions resulted in a reduction of
approximately $10.9 million.

6.3.3 Billing System Implementation

In September of 2009, CWD commenced operation of a new customer billing system. As is


often the case with new billing systems, a number of implementation problems arose shortly
after the first bills were generated. In a number of instances, the billing system generated bills
that appeared to be erroneous. As a result, CWD suppressed a significant number of bills during
the 4th quarter of 2009 and into 2010. CWD applied significant resources to these billing issues
and during 2010 corrected and issued bills to customers. However, as a result of the suppressed
bills the actual revenues received in 2009 were not reflective of actual water used/sold in 2009.
The reduced revenues due to the billing system are assumed to be the difference between the
revenues that would have been generated based on the actual billed consumption and the actual
water sales revenues generated by CWD. In 2009 the reduction in revenue due to billing system
issues is estimated to be approximately $11.8 million ($209 minus $197), which represents
approximately 54% of the total reduction in anticipated revenues. When evaluating 2010 it
appears that the billing issues positively impacted revenues as demonstrated in Exhibit 6.1. In
2010 the actual revenues exceed the anticipated revenues based on water usage by approximately
$6.4 million. It is assumed that the $6.4 million represents revenues from suppressed bills in
2009. At this level of revenue recovery CWD has recovered over half of the bills suppressed in
2009. This is a positive result and demonstrates the effectiveness of additional resources applied
to handle the billing issues in 2010. It is possible that CWD will continue to see additional
revenues from suppressed bills moving forward into 2011.

6.3.4 Summary

The analysis of the primary reasons for reduction in revenues is based on estimates and a number
of assumptions. Over time, additional review may produce more specific data (particularly
related to the billing system issues) as additional data is generated to support different analyses.
Exhibits 6.2 and 6.3 provide a summary of the reductions in revenues by each of the factors. The
percentages and dollar amounts shown in the exhibits represent the portion of the reduction in
revenues.

MFSG 6-6 Cleveland Division of Water


Exhibit 6.2 - 2009 Water Sales Reduction Summary













Exhibit 6.3 - 2010 Water Sales Reduction Summary










It should be noted that Exhibit 6.3 does not account for the additional revenues received in 2010
from suppressed bills in 2009. The exhibit shows what the revenue reduction would have been
had the suppressed bills not been collected in 2010. Table 6.5 presents a summary of the
reduction in revenues in 2009 and 2010.

MFSG 6-7 Cleveland Division of Water


Table 6.5 - Revenue Reduction Summary ($ 1,000’s)
2009 2010
Anticipated Water Sales with Flat Usage $219,098 $221,743
Reduction in Water Sales Due to Demand Factors (6,520) (6,553)
Reduction in Water Sales Due to Economy (3,592) (10,904)
Reduction / Addition to Water Sales Due to Billing System (11,801) 6,380

Total Actual Water Sales Revenues $197,185 $210,665

The analysis of recent revenues from water sales needs to be considered as part of the
Comprehensive Financial Plan, as recent results are used as a basis for developing forecasts. As
demonstrated in Chapter 5 of the report we are assuming continued annual reductions in water
sales due to demand factors. Additionally the starting point for the analysis includes the recent
decreases in consumption due to economic conditions. However future projections do not
assume continued reductions due to the economic recession nor does the projection assume
ongoing issues with the billing system as these issues appear to have been resolved in 2010. The
remainder of this Chapter of the report provides an estimate of revenues under existing rates over
the projection period.

6.4 Future Revenue Assumptions and Evaluation Metrics


A number of assumptions are required to forecast future revenues under existing rates and fees.
The following assumptions were used to project future revenues with current FY 2010 rates and
fees:

• Beginning Total Cash Balance for 2011: $185 million


• Estimated beginning Unencumbered Cash Balance of $94 million
• Projected revenue requirements as presented in Section 3
• Future number of customers as defined by the customer forecast discussed in Chapter 5
• Future water sales as defined by the demand forecast discussed in Chapter 5
• Existing rates for 2010 as shown in Tables 6.1 and 6.2 with no increases
• No increases in any miscellaneous fees and charges or addition of new fees
• Interest income based on average cash investments (average of beginning of year and end
of year) assumed at average interest rate of 2.25% over the study period
• CWD will not make annual escrow payments of $10 million after 2011 due to insufficient
revenues to fund the escrow.

Several metrics are used to evaluate the results of operations under existing rates and fees over
the study period. The metrics, as defined by CWD and its Existing Bond Indenture, include the
following:

• Debt service coverage requirement: 1.25


• Internal target debt service coverage: 1.50
• Minimum allowable/target unencumbered cash balance: $100 million

MFSG 6-8 Cleveland Division of Water


The minimum unencumbered cash balance serves as CWD’s operating reserve as discussed in
Section 3 of this report. The debt service coverage ratio of 1.50 is a CWD internally established
target and the debt service coverage of 1.25 is the minimum required in the Rate Covenants
defined by the Existing Bond Indenture.

6.5 Results of Operations


Based on the assumptions mentioned above, a comparison of total revenue requirements and
revenues under existing rates over the study period is shown in Table 6.6.

Table 6.6 - Net Revenue Requirements with Existing Rates and Fees (2011) ($1,000s)
2011 2012 2013 2014 2015
Total Operating Expenses 141,158 148,026 150,898 154,947 157,965
Total Capital Expenses 101,722 114,994 115,044 114,812 122,126

Total Revenue Requirements $242,880 $263,020 $265,942 $269,759 $280,091

Miscellaneous Revenues 13,900 13,900 13,900 13,900 13,900


Interest Income 4,056 3,821 3,055 1,902 199
Private Fire Protection 4,784 4,784 4,784 4,784 4,784
Subtotal 22,740 22,505 21,739 20,586 18,883

Net Revenue Requirements $220,140 $240,515 $244,202 $249,172 $261,208

Revenues
Customer Service Charges 11,488 11,469 11,450 11,431 11,412
Cleveland Usage Charges 46,176 44,031 42,509 41,060 39,677
Direct Service Usage Charges 132,390 127,326 124,108 121,041 118,089
Master Meter Usage Charge 20,518 20,363 20,209 20,056 19,905
Revenues with Existing Rates $210,572 $203,189 $198,276 $193,588 $189,083

Annual Revenue Shortfall ($9,568) ($37,327) ($45,926) ($55,584) ($72,125)

Cumulative Shortfall ($9,568) ($46,895) ($92,821) ($148,405) ($220,530)

Table 6.6 demonstrates that estimated revenues under the existing rates and fees will be
insufficient to cover the annual revenue requirements. The annual shortfalls range from $9.5
million in 2011 to $72 million by 2015, which represents a cumulative shortfall over the period
of $220 million. Exhibit 6.4 presents graphically the annual net revenue requirements compared
to the anticipated revenues with existing rates and fees.

MFSG 6-9 Cleveland Division of Water


Exhibit 6.4 – Net Revenue Requirements and Revenues with Existing Rates ($1,000s)



   












    
  

There are three primary reasons for the projected annual shortfalls which include the following:

• As mentioned earlier in this chapter, CWD experienced a revenue shortfall in 2010 at the
current 2010 rates which was substantial. The revenue shortfall was offset by
approximately $6.4 million in revenue from suppressed bills in 2009. Therefore CWD is
beginning the study period with revenues below current revenue requirements or in other
words, current rates and fees will not be able to fully fund the revenue requirements. The
primary reason for the current revenue shortfall is due to economic factors impacting
revenues. The economic conditions have resulted in significant reductions in interest
income and further declines in water consumption (beyond estimated declines) both of
which directly impact annual revenues. Another reason for the current revenue shortfall
is due to the fact the comprehensive financial plan developed in 2006 was not fully
adopted by the City. The customer service charge was reduced and also not increased
over the period as proposed and the final year of rate consumption charge increases were
not adopted.

• As revenue requirements increase, existing revenues are not keeping pace. As mentioned
in Section 3, revenue requirements are estimated to increase 14.6% over the study period.

• The other key factor influencing the shortfall is the fact that revenues under existing rates
are projected to fall due to declining customers and customer usage. Over the study
period revenues will decline by approximately 15% from revenues in 2010. Even

MFSG 6-10 Cleveland Division of Water


without increases in expenses, CWD would have to increase rates at a level of about
3% per year to just keep revenues at the current levels due to declining
consumption.

The combination of current starting position, revenue requirement increases and declining
revenues results in the need for an approximately 32% cumulative revenue increase over
the study period.

The annual revenue shortfalls presented in Table 6.6 will negatively impact the financial health
of CWD. To assess the full impact of the results of operations under existing rates and fees, the
metrics discussed above need to be applied. Table 6.7 demonstrates the impact on CWD’s debt
service coverage ratio. As mentioned above, CWD has historically maintained a minimum target
coverage ratio of 1.50 or more while the Rate Covenants defined in the Existing Bond Indenture
requires a minimum coverage of 1.25.

Table 6.7 - Debt Service Coverage with Existing Rates (2010)


($1,000s) 2011 2012 2013 2014 2015
Water Sales Revenues with Existing
210,572 203,189 198,276 193,588 189,083
Rates
Miscellaneous Revenues 13,900 13,900 13,900 13,900 13,900
Interest Income 4,056 3,821 3,055 1,902 199
Private Fire Protection 4,784 4,784 4,784 4,784 4,784
a Total Revenues 233,312 225,694 220,015 214,175 207,966
b Total O&M Expenditures 141,158 148,026 150,898 154,947 157,965
c Net Revenue for Debt Service (a-b) $92,153 $77,668 $69,117 $59,228 $50,001

d Existing Debt Service(1) 82,700 75,523 71,138 68,269 66,318


d Projected Debt Service(1) - - 4,726 4,726 10,311
Escrow Deposit - - - - -
Use of Previous Year Escrow (9,979) - - - -
Total Debt Service Expenditures $72,721 $75,523 $75,864 $72,995 $76,629

Debt Service Coverage (c / d) 1.27 1.03 0.91 0.81 0.65


(1)
Represents existing and future parity indebtedness and excludes subordinate debt as specified in the coverage
calculation in the Existing Bond Indenture.

Table 6.7 demonstrates that the use of existing rates and fees for future years will not allow
CWD to meet its debt service coverage required by its Rate Covenant. In 2012, CWD will not
meet the Rate Covenant which would then require notification of the Bond Trustee and CWD
ultimately would be required to increase rates to meet the coverage requirements. If CWD did
not increase rates it would be in default. In 2013, the coverage drops below 1.0 which essentially
means that CWD would no longer be able to make its debt service payments with current
revenues (a portion of debt payments would need to be funded from cash reserves). It should be
noted that in reality CWD would experience difficulty in its attempt to acquire additional long
term debt should the coverage results shown in Table 6.7 actually occur. As a result the

MFSG 6-11 Cleveland Division of Water


continuation of the capital improvement program would be in jeopardy as CWD would not be
able to secure financing for additional projects or could do so only at exorbitant interest rates.

The final metric used to evaluate the adequacy of existing rates and fees is the impact on CWD’s
cash balance. As mentioned, CWD currently maintains a minimum target unencumbered cash
balance of approximately $100 million as an operating reserve. Table 6.8 presents the impact on
CWD’s unencumbered cash balance over the study period if rates and fees remain at current
levels.

Table 6.8 - Unencumbered Cash Balance with Existing Rates (2010)


($1,000s) 2011 2012 2013 2014 2015
a Beginning Cash Balance 185,421 175,078 138,728 94,471 41,128
b Revenues(1) 228,193 221,410 216,366 211,021 205,476
c Expenditures(1) 238,536 257,760 260,623 264,364 274,489
d Ending Cash Balance (a + b - c) 175,078 138,728 94,471 41,128 (27,885)

e Less Liabilities 6,033 6,396 6,614 6,680 6,431

f Less Reserve for Pre-Encumbrances(2) 52,523 41,618 28,341 12,339 -


g Less Reserve for Encumbrances(3) 17,508 13,873 9,447 4,113 -
Total Reserves 70,031 55,491 37,788 16,451 -

Unencumbered Cash Balance End


h $99,013 $76,840 $50,069 $17,997 $(34,316)
of Year (d - e - f - g)

i Fund Balance Policy Target 100,000 100,000 100,000 100,000 100,000


Excess Fund Balance (h – i) ($987) ($23,160) ($49,931) ($82,003) ($134,316)
(1)
Revenues and expenditures are presented on a cash basis for calculation of cash balances
(2)
Based on historical reserve ratio of 30% of ending cash balance designated for pre-encumbrances.
(3)
Based on historical reserve ratio of 10% of ending cash balance designated for encumbrances.

Table 6.8 demonstrates that CWD will not meet its minimum target balance for unencumbered
cash in 2011 or any other year during the study period at existing rates. In fact by 2015 CWD
will have exhausted all of its cash resources. The reduction in cash resources results from the
annual cash shortfalls as shown in Table 6.6 (i.e. CWD is not able to fund its operations and
therefore must use reserves). By 2015, CWD will have exhausted all of its cash and will be
insolvent. Operating in this manner will result in the following:

• CWD’s access to the capital market for system repairs/upgrade will be eliminated,
resulting in an inability to maintain the water system.
• CWD’s cash flow will be significantly disrupted resulting in an inability to fund
operating expenses (CWD would not be able to purchase materials goods necessary for
operation).
• Ultimately, bankruptcy of the CWD system will occur.

MFSG 6-12 Cleveland Division of Water


Exhibit 6.5 presents the total cash balance, target unencumbered cash balance and the anticipated
unencumbered cash balance under existing rates and fees.

Exhibit 6.5 - Projected Total Cash Balance, Unencumbered Cash Balance Target and Projected
Unencumbered Cash Balance ($1,000s)









    


 


6.6 Summary
The analysis presented in this chapter of the report demonstrates that CWD’s cost of providing
water service to its customers over the next five years will exceed revenues generated by existing
rates and fees. Expenditures will outpace revenues by about 32% cumulatively over the study
period. The results of the shortfalls in revenues will greatly jeopardize the financial viability of
CWD. Existing cash balances will be exhausted and the Rate Covenants on existing debt will
not be met, resulting in default. As a result, CWD is faced with either significantly cutting
operating and capital expenditures and not continuing capital improvements or increasing water
rates and fees. However, since the majority (approximately 80%) of CWD’s operating and
maintenance costs are fixed and the capital projects included in the capital improvements
program are necessary to ensure that the system remains operable, realistically CWD must
increase rates and fees while continually looking for opportunities for efficiencies in
operation to reduce expenditures.

MFSG 6-13 Cleveland Division of Water


7.0 MISCELLANEOUS REVENUE

The purpose of this chapter is to develop and present recommendations for ancillary fees and
charges based on a cost of service analysis that was completed. These fees and charges support
the miscellaneous revenue projections referenced in previous sections of this report.

Ancillary fees are charged to customers for individual services that are provided and are un-
related to the general utility operations. Miscellaneous (or non-rate) revenues are revenues
derived from sources other than water rates. Sources include interest income, fire protection
service, and ancillary fees. Non-rate revenues help offset the gross revenue requirements and
reduce the revenue required from metered water sales.

7.1 Private Fire Protection Service


Fire protection service differs from most other services provided by CWD. Essentially, it is a
standby service that the CWD makes available on demand. While fire lines are rarely used by
the customer, CWD must be ready to provide water quantities (often very significant quantities)
and pressures at all times throughout the distribution system for fire fighting purposes. As a
result, CWD incurs an ongoing cost associated with providing these services.

It is common practice for utilities to charge a fixed quarterly or monthly fee to recover at least a
portion of the costs associated with fire protection services. CWD currently charges for private
fire protection based on the size of the line serving the account for fire protection service.

To evaluate the appropriateness of the current private fire protection charges it was necessary to
determine the estimated costs incurred by CWD while providing the service. Since CWD does
not specifically track the cost of providing private fire protection, the total cost of fire protection
first must be determined. The CWD system includes both private and public fire service. Public
fire service includes public fire hydrants located throughout the system. The hydrants are owned
and maintained by CWD. Similar to private fire protection, CWD incurs the cost (both operating
and capital) of making water supply available at a specific volume and pressure at the public
hydrants. Therefore it is necessary to determine the total cost of providing fire protection and
then allocate those costs to private fire protection and public fire protection.

The Maine Formula (a series of curves and formulae developed by the Maine Public Utility
Commission [PUC] to allocate the costs of water systems between potable and fire protection)
was used to calculate the estimated cost of fire protection since CWD does not track these costs.
The Maine Formula is an approach often used in the utility industry to estimate public and
private fire protection costs when fire protection costs are not specifically tracked by the utility.
The approach is outlined in American Water Works Association (AWWA) M1 Manual,
Principles of Water Rates, Fees, and Charges. The Maine Formula provides an estimate of the
portion of the total revenue requirements attributed to fire protection based on the population
served by the utility and the estimated peak hour system demand.

MFSG 7-1 Cleveland Division of Water


Based on the population served by CWD, the Maine Formula estimates that approximately 6% of
CWD’s total cost of providing water service is allocable to fire protection. This equates to
approximately $16 million for 2011. To allocate the total cost of fire protection between public
and private, the number of public and private equivalent fire connections (number of hydrants
and fire lines by line size) was calculated and the total fire protection costs were proportioned
based on this ratio. The current equivalents by line size are shown in Table 7.1.

Table 7.1 - Fire Line Equivalents


Line Size Equivalent
1 1/2” 1.00
2” 1.00
3” 1.00
4” 2.72
6” 3.92
8” 7.00
10” 10.96
12” 14.96

The equivalent factors currently used by CWD were used to determine the total fire protection
equivalents in the CWD system (public and private). There are 70,370 public fire protection
equivalents and approximately 27,994 private fire protection equivalents in the system. The
ratio of public equivalents to total equivalents results in a ratio of approximately 72% related to
public fire protection service with the remainder (28%) representing private fire service.

Table 7.2 presents the total system annual revenue requirements from Section 3 of this report, of
which 6% of the total revenue requirements is attributed to fire protection. The portion of the
revenue requirements attributed to fire protection is then allocated between private and public
service based on the ratio of fire protection equivalents.

Table 7.2 - Private Fire Protection Revenue Requirements ($1,000s)


2011 2012 2013 2014 2015
a Total Revenue Requirement $242,880 $263,020 $265,942 $269,759 $280,091
b Total Fire Protection (6.5% of a) $15,787 $17,096 $17,286 $17,534 $18,206
Public Fire Protection (72% of b) $11,294 $12,231 $12,367 $12,544 $13,025
Private Fire Protection (28% of b) $4,493 $4,866 $4,920 $4,990 $5,181

The determination of the revenue requirements related to private fire protection allows for the
calculation of the appropriate private fire protection charges. The charges are calculated using
the equivalents shown in Table 7.1 to proportion the charges based on line size. Table 7.3
presents the calculated private fire protection charges over the study period.

MFSG 7-2 Cleveland Division of Water


Table 7.3 - Projected Private Fire Protection Charges
Quarterly Private Fire Protection Charge
Line Size
2010 2011 2012 2013 2014 2015

1 1/2” $41.57 $40.12 $43.45 $43.93 $44.56 $46.27


2” $41.57 $40.12 $43.45 $43.93 $44.56 $46.27
3” $41.57 $40.12 $43.45 $43.93 $44.56 $46.27
4” $113.08 $109.15 $118.20 $119.51 $121.23 $125.87
6” $162.96 $157.29 $170.34 $172.23 $174.70 $181.39
8” $291.00 $280.88 $304.17 $307.55 $311.96 $323.91
10” $455.62 $439.77 $476.24 $481.53 $488.44 $507.15
12” $621.91 $600.28 $650.06 $657.28 $666.71 $692.25

Table 7.3 demonstrates that the current fire protection charges are set a level that is close to the
current cost of providing the service. For this reason we recommend that the current charge be
kept in place in 2011 and then increased annually over the study period as shown in Table 7.3
based on the annual increases in total revenue requirements.

7.2 Ancillary Fees and Charges


Ancillary fees are for services un-related to the general operations of the utility. Table 7.4
summarizes the CWD ancillary fees and approximate number of transactions per year related to
each fee. Transaction information is estimated based on actual historical data from years 2006 to
2009. Fees are listed by revenue category. These categories are consistent with the way
revenues are summarized in the CWD annual budget.

Table 7.4 - Transaction per year by Ancillary Fee by Revenue Category


Annual Transactions
Flat Rate Jobs
Plugging Connections 86 Connections
Install / Replace Meters 474 Meters
Chlorination of Water Mains 97,404 Linear Feet
Meter Inspections / Meter Tests 305 Meters
Reading Registering Meters 10,870 Meters
Meter Settings 58 Meters

Cost Plus Jobs


New Connections - Domestic(1) 13,048 Meters
New Connections - Fire Supply(1) 53 Fire Lines
Tapping Sleeve and Valve(1) 17 Tapping Sleeves and Valves
Curb Valve 139 Curb Valves

MFSG 7-3 Cleveland Division of Water


Annual Transactions
Hydrant Rents
Water Use at Construction Sites - Residential Permit 2,100 permits
Water Use at Construction Sites - Residential Use 225 MCF
Water Use at Construction Sites - Commercial Permit 900 permits
Water Use at Construction Sites - Commercial Use 100 MCF
Direct Service Suburb Hydrants 0.5 MCF per Hydrant

Miscellaneous Engineering Service Fees


Copy fee for roll maps, engineering drawings 18 Copies
Plan reviews < 150 Linear Feet -
Plan reviews > 150 Linear Feet 47,074 Linear Feet
Plumber Certification 170 Certifications

Miscellaneous Customer Service Fees


Special Requests 2,350 Requests
Call-Back Service 4,110 Call Backs
Returned Checks 6,000 Returned Checks
(1)
55% surcharge for concrete pipe and connections

As part of the study a detailed cost of service analysis was completed for each of the existing
ancillary fees. The analysis evaluates the costs that CWD incurs to provide service to evaluate if
the fees are set at the appropriate levels to recover the cost of providing the service. Based on
discussions with CWD Engineering and Customer Service sections, labor estimates (in hours)
were determined and a blended hourly rate was calculated for each section. The blended hourly
rate includes the costs associated with the salaries and benefits for employees in each section. It
also includes a surcharge for vehicles and shared equipment. The background and detailed cost
of service analysis for the ancillary fees and charges can be found in Appendix A to this report.

Tables 7.5 through 7.9 provide a summary of the current and recommended rates by meter size
and transaction type for the existing ancillary fees listed in Table 7.4. A majority of the
proposed rate increases represent an increase that is based upon annual inflation in labor and
material costs. A few of the fees have a proposed increase slightly higher than normal inflation
based upon the results of cost of service analysis and a more accurate required labor estimate.
Tables 7.5 - 7.9 are organized by revenue category, consistent with the organization in Table 7.4.

Table 7.5 - Current and Proposed Ancillary Fees in Flat Rate Jobs Revenue Category
2011 2012 2013 2104 2015
Plugging Connections
< 2" $1,599 $1,675 $1,753 $1,837 $1,923
2" - 12" $2,132 $2,232 $2,337 $2,449 $2,563
> 12" $2,665 $2,790 $2,921 $3,061 $3,203

MFSG 7-4 Cleveland Division of Water


2011 2012 2013 2104 2015
Install / Replace Meters*
1" - Vault Setting $191 $197 $204 $212 $218
1" - Inside Setting w/ Remote
$235 $243 $251 $260 $269
Reading Device
1 ½” Vault Setting $224 $232 $239 $249 $256
1 1/2" - Inside Setting w/ Remote
$275 $285 $294 $306 $315
Reading Device
2" $281 $290 $300 $311 $321
3" $780 $807 $833 $866 $893
4" $1,387 $1,435 $1,482 $1,539 $1,587
6" $2,983 $3,086 $3,186 $3,310 $3,413
8" $5,005 $5,177 $5,345 $5,553 $5,727
10” $5,959 $6,163 $6,363 $6,612 $6,818
12” $8,341 $8,628 $8,908 $9,256 $9,544
2" Compound $1,779 $1,840 $1,899 $1,973 $2,035
3" Compound $2,171 $2,245 $2,318 $2,409 $2,484
4" Compound $2,562 $2,650 $2,736 $2,843 $2,931
6" Compound $4,413 $4,565 $4,713 $4,897 $5,050
8" Compound $7,017 $7,258 $7,493 $7,786 $8,029
10” Compound $8,355 $8,641 $8,922 $9,270 $9,559
12” Compound $11,695 $12,096 $12,489 $12,977 $13,381
*CWD is in the process of installing automated meter reading equipment and therefore future meter installs and
replacements will need to be evaluated once the system is in place.
Chlorination of Water Mains
4" $0.55 $0.57 $0.60 $0.63 $0.66
6" $0.55 $0.57 $0.60 $0.63 $0.66
8" $0.70 $0.74 $0.78 $0.81 $0.86
10" $0.70 $0.74 $0.78 $0.81 $0.86
12" $0.86 $0.90 $0.95 $1.00 $1.05
16" $0.95 $0.99 $1.04 $1.09 $1.15
20" or greater (deposit + cost) deposit + cost

Meter Inspections / Meter Tests


1" or less $52 $54 $56 $58 $60
1 ½” - 4" $106 $110 $113 $118 $121
Over 4" $210 $218 $225 $234 $241

Reading Registering Meters $1.47 $1.54 $1.62 $1.70 $1.79

Meter Settings
1" or less $157 $162 $167 $174 $179
1 1/2" $470 $486 $502 $522 $538
2" $470 $486 $502 $522 $538

MFSG 7-5 Cleveland Division of Water


2011 2012 2013 2104 2015
3" $470 $486 $502 $522 $538
4" $618 $639 $660 $686 $707
6" $812 $840 $868 $902 $930
8" $1,027 $1,063 $1,097 $1,140 $1,176
10" $1,293 $1,338 $1,381 $1,435 $1,480
12" $1,582 $1,636 $1,689 $1,755 $1,810

Table 7.6 - Current and Proposed Ancillary Fees in Cost Plus Jobs Revenue Category
2011 2012 2013 2104 2015
New Connections
Domestic and Fire Supply(1)
1" or less $299 $310 $320 $332 $342
1 1/2" $1,430 $1,479 $1,527 $1,587 $1,636
2" $1,551 $1,604 $1,656 $1,721 $1,775
3" $1,560 $1,614 $1,666 $1,732 $1,785
4" $1,990 $2,059 $2,126 $2,209 $2,277
6" $2,094 $2,165 $2,236 $2,323 $2,396
8" $2,355 $2,436 $2,515 $2,613 $2,695
10" $2,804 $2,900 $2,994 $3,111 $3,208
12" $3,925 $4,060 $4,191 $4,355 $4,491

Tapping Sleeve and Valve(1)


6" or less $1,299 $1,360 $1,422 $1,490 $1,558
8" $1,318 $1,379 $1,443 $1,511 $1,580
10" $1,355 $1,418 $1,483 $1,553 $1,624
12" $1,410 $1,476 $1,543 $1,617 $1,691
16" $1,652 $1,728 $1,808 $1,894 $1,981
20" or greater (requires deposit) $5,011 $5,243 $5,484 $5,745 $6,008

Curb Valve
1 1/2" $144 $149 $153 $159 $164
2" $144 $149 $153 $159 $164
3" $287 $297 $307 $319 $329
4" $287 $297 $307 $319 $329
6" $287 $297 $307 $319 $329
8" $287 $297 $307 $319 $329
10" $431 $446 $460 $478 $493
12" $431 $446 $460 $478 $493
(1)
Add 55% surcharge for concrete pipe and connections

MFSG 7-6 Cleveland Division of Water


Table 7.7 - Current and Proposed Ancillary Fees in Hydrant Rents Revenue Category
2011 2012 2013 2104 2015
Water Use Construction Sites
Residential ($/permit) $41 $43 $45 $47 $50
Residential ($/MCF) Charged at additional MCF rate in applicable service district

Commercial ($/permit) $122 $128 $134 $141 $148


Commercial ($/MCF) Charged at additional MCF rate in applicable service district

Water Use Non- Fire Fighting(1)


Rate ($/ MCF) Charged at additional MCF rate in applicable service district
(1)
Water Use for Non-Fire Fighting purposes is outlined in the Direct Service Agreement. Each fire
hydrant(except for the City of Brunswick) is charged 0.5MCF annually at the applicable additional MCF rate
to recover costs associated with hydrant water use for line flushing, street flushing, and all other non-fire
fighting uses. The rates presented in Table 7.7 are from Section 9 of this report.

Table 7.8 - Current and Proposed Ancillary Fees in Miscellaneous Engineering Service Fees Revenue
Category
2011 2012 2013 2104 2015
Copy Fee ( $ / copy)
$4.44 $4.59 $4.74 $4.92 $5.08
roll maps, engineering dwgs

Plan reviews ( $ / plan)


$178 $184 $190 $197 $203
< 150 L.F.

Plan reviews ($ / L.F.)


$2.22 $2.30 $2.37 $2.46 $2.54
>150 L.F.

Plumber Certification $44 $46 $47 $49 $51

Table 7.9 - Current and Proposed Ancillary Fees in Miscellaneous Customer Service Fees Revenue
Category
2011 2012 2013 2104 2015
Special Requests $18 $19 $20 $21 $22
Call-Back Service $29 $30 $31 $32 $33
Returned Checks $30 $31 $32 $33 $34

Based upon the cost of service analysis and the recommended fees and charges displayed above,
Table 7.10 provides a summary of revenues by ancillary fee and revenue category.

MFSG 7-7 Cleveland Division of Water


Table 7.10 - Summary of Projected Ancillary Fee Revenues
($1,000s) 2011(1) 2012 2013 2014 2015
Flat Rate Jobs
Plugging Connections $148 $155 $162 $170 $178
Install / Replace Meters $149 $164 $169 $176 $181
Chlorination of Water Mains $69 $74 $77 $81 $85
Meter Inspections / Meter Tests $22 $28 $29 $30 $31
Reading Registering Meters $16 $17 $18 $18 $19
Meter Settings $106 $116 $120 $124 $128

Cost Plus Jobs


New Connections - Domestic $533 $566 $584 $607 $626
New Connections - Fire Supply $112 $119 $123 $128 $131
Tapping Sleeve and Valve $23 $25 $26 $27 $28
Curb Valve $31 $33 $34 $36 $37

Hydrant Rents
Water Use at Construction Sites $200 $215 $225 $237 $249
Direct Service Suburb Hydrants $1,232 $1,268 $1,292 $1,339 $1,387

Miscellaneous Engineering Service Fees $112 $116 $120 $125 $129

Miscellaneous Customer Service Fees $335 $354 $366 $379 $391

Total Revenues from Ancillary Fees and


$3,006 $3,166 $3,260 $3,388 $3,509
Charges
(1)
It is assumed that CWD increases ancillary fees and charges in July of 2011 and therefore generates half a
years revenues at the new fees. The revenue shown in Table 7.10 represents a half year of revenue at 2010
fees and a half year revenue at the new fees.

Over the planning period, revenues collected from ancillary fees and charges increase by
approximately 15%. This increase is primarily due to normal increases in labor and material
costs. In a few circumstances, increases were recommended to bring fees up to a level that will
fully recover the costs associated with such service. Detailed calculations for each fee are shown
in Appendix A to this report.

7.3 Non-Rate Miscellaneous Revenue


The ‘Non-Rate” category includes revenues from services provided by CWD to other agencies
and from investments. Each revenue category is explained below.

• Other Divisions – Represents primarily payments for billing services provided to the City
of Cleveland Division of Water Pollution Control (WPC). It also includes payments for
security personnel provided by CWD to WPC and Cleveland Public Power (CPP). The
revenues from this category are forecasted to increase by 3% per year to reflect inflation.

MFSG 7-8 Cleveland Division of Water


• NEORSD Billing Charges – Represents payments for billing services provided to the
North East Ohio Regional Sewer District (NEORSD). It should be noted that a new
billing agreement is currently being negotiated between CWD and NEORSD. However,
until the detail of that agreement is available, the charges for NEORSD billing are
projected to remain constant during the study period.

• Property Rent – Represents income from the use of CWD owned property. CWD leases
space on several of its water towers to cell phone companies for their equipment. The
revenues from property rents are forecasted to increase by 3% per year to reflect
inflation.

• Other Income – Represents income from vendor refunds, jury duty fees, consultant ID
card fees, sale of scrapped vehicles and sale of scrap materials. The revenues from other
income are forecasted to increase by 3% per year to reflect inflation.

• Interest Income – Represents interest earned on investments made by the City’s Finance
Department on behalf of CWD. Interest income is based on the average of the beginning
and ending balance cash balances held by CWD. The interest income is projected by
assuming 2.25% interest is earned in 2011, increasing over the planning period to 3% by
2015. The assumption of 2.25% interest earned on investments in the initial years of the
study period is low compared to the long-term historical earning rate, but it is consistent
with the actual results CWD has seen in the recent past (last 18 months).

Table 7.11 summarizes the projected Non-Rate Miscellaneous Revenues for the planning period
2011 - 2015.

Table 7.11 - Summary of Projected Non-Rate Miscellaneous Revenues


($1,000s) 2011 2012 2013 2014 2015
Other Divisions 5,638 5,807 5,981 6,160 6,345
NEORSD Billing Charges 4,940 4,940 4,940 4,940 4,940
Property Rent 263 271 279 288 296
Other Income 147 152 156 161 166
Interest Income(1) 4,169 4,443 4,706 5,099 5,537
Total Other Miscellaneous Revenues $15,157 $15,612 $16,062 $16,648 $17,284
(1)
Interest income forecasts assumes CWD increases rates and fees in order to maintain unencumbered cash
balance of around $100 million.

7.4 Summary
Based on our review of the costs incurred by CWD while providing miscellaneous services, we
recommend that the ancillary fees and charges associated with each service be adjusted to match
the cost of service. The recommended ancillary fees are presented in Tables 7.5 -7.9. We
recommend that CWD maintain the current private fire protection charges in 2011 but adjust
them beginning in 2012 as presented in Table 7.3.

MFSG 7-9 Cleveland Division of Water


The revenues CWD receives from non-rate miscellaneous revenues are forecasted to increase
over the study period. The increase is primarily due to improving interest income as the
economy recovers over the study period. Table 7.12 summarizes the total miscellaneous
revenues projected for CWD over the study period.

Table 7.12 - Total Miscellaneous Revenues


($1,000s) 2011 2012 2013 2014 2015
(1)
Private Fire Protection 4,655 4,866 4,920 4,990 5,181
Ancillary Fees and Charges(2) 3,006 3,166 3,260 3,388 3,509
Non-Rate Miscellaneous Revenue 15,157 15,612 16,062 16,648 17,284

Total Miscellaneous Revenues $22,818 $23,644 $24,242 $25,026 $25,975


(1)
It should be noted that the revenues from fire protection do not match the revenue requirements in Table 7.2 in
2011 due to the recommendation to not lower the charges in these years.
(2)
It is assumed that CWD increases ancillary fees and charges in July of 2011 and therefore generates half a
years revenues at the new fees.

MFSG 7-10 Cleveland Division of Water


8.0 COST OF SERVICE ANALYSIS

The purpose of this chapter is to the present the results and key findings of the cost of service
study, which was conducted as part of the CWD comprehensive financial plan. This section
presents an overview of the approach, assumptions, and findings of the study.

A cost of service analysis is an important element in testing the equity of water rates among
customer groups. The cost of service study results have been used to aid in the development of
rate structure alternatives and proposed rates for each of the districts served by CWD and
discussed in further detail in Section 9 of this report.

8.1 Approach
As discussed in previous sections of this report, CWD rate districts are defined by geographic
location. They are categorized according to the four operational districts of the CWD system and
divided into five rate districts: Cleveland, Suburban Low Service, Suburban 1st High Service,
Suburban 2nd High Service, and Suburban 3rd High Service. Each district has operating
characteristics that cause CWD to incur specific costs. For example, the Suburban 3rd High
Service district is the furthest district from the water treatment plants and therefore requires
CWD to have additional secondary pump stations and transmissions mains to deliver water to
that district.

The main objective of the cost of service study is to determine the appropriate costs to be
recovered from each district and evaluate those costs in relation to each other. The approach used
to complete the cost of service analysis is summarized below and shown in Exhibit 8.1.

Step 1 - Functionalize: The first step is to identify and functionalize CWD operating and capital
costs. Operating costs are identified in the CWD operating and maintenance (O&M) budget on
an annual basis. Capital costs are identified in two main categories:

• Existing debt service, as provided by the amortization schedules of outstanding bonds


issued by CWD on an annual basis.

• Future capital expenses, as provided by the CWD 10-year Capital Improvement Program
(CIP).

Step 2 - Allocate: The second step is to allocate the functionalized operating and capital costs to
the appropriate district. The intent of the allocation is to ensure that a customer (or group of
customers) is charged a rate that fully recovers the costs that they cause CWD to incur while
providing water service. Allocation factors are based on system operating and physical
characteristics.

Step 3 - Cost of Service Differentials: The third step requires the calculation of unit rates for
each district, which is calculated by dividing the total costs allocated to a district by the total

MFSG 8-1 Cleveland Division of Water


billed water for that district. The district differentials are then determined based on the relative
value of each district’s unit rate to the unit rate calculated for the Cleveland district.

Step 4 - Cost of Service Ownership Surcharge: As part of the cost of service analysis, an
ownership surcharge was calculated to estimate the value of the risks (financial, legal and
operational) that CWD incurs while providing service to customers outside the boundaries of the
City of Cleveland. The surcharge calculation includes a quantitative and qualitative component.
The quantitative component follows a methodology that includes a rate of return, which
compensates the City for its use of debt capacity by non-citizens, and enables the utility to
maintain its credit and acquire new capital. The qualitative component is essentially a risk factor.
The City of Cleveland takes on major risk of operating the water system while providing service
to customers outside the City’s corporate limit and deserves to be compensated for assuming this
risk.

Step 5 - Master Meter Cost of Service: CWD serves five Master Meter Communities through
the four operational districts. Master Meter Communities do not require the same level of
service as retail customers. There are various expenses within the CWD O&M budget and 10-
year CIP that should be excluded from the rates charged to the Master Meter Communities. The
final step of the cost of service analysis is to identify those costs and calculate the differential to
be used to calculate the master meter rates for each district.

Exhibit 8.1 - Cost of Service Approach

Revenue Requirements

Functionalize
Customer WTP General CWD General
Information and Distribution and Budget and
Account Ops and
Technology Maintenance Finance
Administration and Engineering
Services Pumping Management

Operational Districts - Geographic Basis

Low 1st High Service 2nd High Service 3rd High Service

Classification - Rate District

Suburban Wholesale
City of Suburban Suburban
Low / 1st - Master
Cleveland 2nd High 3rd High
High Meter

The cost of service analysis uses 2010 as the Base Year for which district differentials are
calculated. The calculated differentials will remain appropriate for the duration of the 5 year

MFSG 8-2 Cleveland Division of Water


planning period, and potentially for the duration of the 10-year capital program. If significant
changes are made to the planned system investment listed in the out years of the current capital
program, the rate differentials would need to be re-evaluated in light of those changes at the
development of the next five year financial plan.

8.2 Cost of Service Analysis


Allocation factors were developed based on system characteristics and functionality. These
factors are used to distribute operating and capital costs to the appropriate district. Each
allocation factor was determined based on various types of system information, including the
amount of water delivered to each district, the miles of mains (both transmission and
distribution), and the number of customer accounts (meters). The allocation factors were
developed working with CWD staff. Table 8.1 lists the various cost allocation factors used to
complete the cost of service study.

Table 8.1 – Cost Allocation Factors


Allocation Factor Basis / Units Cleveland Low 1st High 2nd High 3rd High
Trans-PV Pumping Volumes 33.45% 10.03% 5.44% 34.27% 16.81%
Raw Water Pumping
Trans-Raw 32.90% 7.30% 16.40% 29.20% 14.20%
Volumes
Distribution LF Linear Feet 27.70% 5.90% 12.86% 27.85% 25.69%

Distribution V Pipe Volume 25.05% 5.53% 13.56% 28.26% 27.59%

Storage Volume 20.80% 4.59% 16.55% 35.23% 22.83%

Pump-V Pumping Volumes 29.18% 6.64% 14.36% 29.58% 20.25%

Pump-HP Horse Power 21.56% 5.60% 14.02% 34.17% 24.65%

Customer FY10 Accounts 30.46% 6.17% 13.32% 29.87% 20.18%

Volume FY10 Billable MCFs 33.74% 8.32% 14.68% 26.59% 16.67%

Plants Flow Volume 33.00% 7.00% 17.00% 29.00% 14.00%

Parma - Plant Flow Volume 0.00% 0.00% 0.00% 65.00% 35.00%

Parma - Res Flow Volume 19.00% 0.00% 31.00% 50.00% 0.00%

Cleveland Direct Allocation 100.00% 0.00% 0.00% 0.00% 0.00%

Suburban Low Direct Allocation 0.00% 100.00% 0.00% 0.00% 0.00%

Suburban 1st High Direct Allocation 0.00% 0.00% 100.00% 0.00% 0.00%

Suburban 2nd High Direct Allocation 0.00% 0.00% 0.00% 100.00% 0.00%

Suburban 3rd High Direct Allocation 0.00% 0.00% 0.00% 0.00% 100.00%

MFSG 8-3 Cleveland Division of Water


All major categories of expenses, including individual capital projects and CWD operating and
maintenance expenses, were distributed to the five major districts using the cost allocation
factors listed in Table 8.1.

8.2.1 Operating Expenses

In Section 3 of this report, CWD operating costs are summarized by budgetary section. To
functionalize the CWD operating expenses, the sections were reviewed at a more detailed level
based on functional groups. Table 8.2 lists the 2010 O&M costs by functional group.

Table 8.2 - Functionalized O&M Expenses ($1,000s)


Functional Group % of 2010 Budget 2010
Customer Account Services 7.76% $10,617
Plant Operations - General 17.00% 23,260
Plant Operations - Pumping / Energy Costs 11.90% 16,281
Information and Technology 7.62% 10,424
Distribution and Maintenance 24.96% 34,149
Budget and Finance 1.70% 2,330
Water General 9.09% 12,436
Administration / Water Management 7.03% 9,622
Human Resources 2.82% 3,853
Engineering 10.12% 13,853
Total CWD O&M Expenses 100.00% $136,824

Each of the functional groups listed in the Table 8.2 are further divided into sub-categories.
Costs at the sub-category level were assigned an allocation factor from Table 8.1. A listing of
the sub-categories and corresponding allocation are summarized in the Appendix B of this report.
The results of this allocation are shown in Table 8.3 at the functional group level.

Table 8.3 - Cost Allocation % by O&M Functional Group


Functional Group Cleveland Low 1st High 2nd High 3rd High
Customer Account Services 30.46% 6.17% 13.32% 29.87% 20.18%
Plants 25.68% 6.45% 13.08% 33.19% 21.61%
Information and Technology 30.46% 6.17% 13.32% 29.87% 20.18%
Distribution and Maintenance 25.22% 5.55% 13.55% 28.31% 27.36%
Budget and Finance 30.46% 6.17% 13.32% 29.87% 20.18%
Water General 30.46% 6.17% 13.32% 29.87% 20.18%
Water Management 33.74% 8.32% 14.68% 26.59% 16.67%
Human Resources 30.46% 6.17% 13.32% 29.87% 20.18%
Engineering 29.44% 6.05% 13.36% 29.57% 21.58%
Total CWD O&M Expenses, % 27.90% 6.24% 13.41% 30.18% 22.28%
Total CWD O&M Expenses (2010),
$38,172 $8,531 $18,343 $41,292 $30,486
($,000)

MFSG 8-4 Cleveland Division of Water


Table 8.3 shows the allocation of total CWD O&M expenses for 2010 to each of the five
districts. The overall allocation percentages were calculated using a weighted average of costs
by sub-category and functional group. Based on the analysis, CWD should recover 27.9% of all
O&M expenses through the rate charged to Cleveland customers. The cost allocation, shown in
Table 8.3, of total O&M expenses for all districts were used to distribute annual O&M costs to
each of the districts.

8.2.2 Capital Expenses

Two main categories of capital expense were reviewed and allocated to each district as part of
the cost of service study. The capital expenses include existing debt service and future capital
(cash and debt associated with future capital investments). The following section examines each
capital cost category separately, discusses the capital cost allocation methodology and the factors
used to distribute each category of capital costs to the appropriate districts. Exhibit 8.2 presents
an overview of the capital expense allocation methodology.

Exhibit 8.2 – Capital Expense Allocation Methodology*

*It should be noted that the cost of service analysis was completed by mid-year 2010 and
therefore at the time of the analysis some of the 2010 capital projects had not yet been
completed.

Existing Debt / Historical and Recent Past Capital Investment

To distribute the existing debt service to each of the districts, a review of completed capital
projects over the last twenty years (1988 – 2009) was necessary. This time frame was chosen to
reflect the major projects for bonds that have been issued and that are still being paid off. The
operating function of the projects completed is used to define the allocation factor that should be
used to distribute those costs to each of the districts. Major capital investments made by CWD
beginning in 1988 through 2005 were reviewed and allocated as part of the last cost of service
study completed in 2005. For purposes of this report and analysis, this information is

MFSG 8-5 Cleveland Division of Water


summarized but has not been adjusted. This analysis relies on the data and work that was
performed prior to 2006.

Major capital project costs for the period of 1988 - 2005 were allocated to each of the rate
districts. A total of $1,138,030,971 of capital project expense was distributed for the 18 year
period of 1988 - 2005. This is an annual average capital spending of approximately $63 million
per year. Individual projects were assigned cost allocation scenarios (defined in the previous
study) to distribute their costs. The results of this allocation were provided by the results of the
previous cost of service study and are summarized below in Table 8.4.

Table 8.4 - Cost Distribution for Major Capital Projects (1988 – 2005)
Cleveland Low 1st High 2nd High 3rd High
Capital Projects (1988 – 2005) 30.03% 5.40% 13.73% 27.87% 22.97%

Major capital projects for the past four years (2006 – 2009) were reviewed and associated project
costs were distributed to each of the five districts based upon allocation factors assigned to each
project. A total of $274,953,174 was distributed for this four year period. This is an annual
average capital spending of approximately $69 million per year. The allocation factors used to
distribute capital costs are the same as those used to distribute O&M costs and are found on
Table 8.1. Table 8.5 summarizes the results of allocation of each capital project. A detailed
listing of capital projects and corresponding cost allocation factors are provided in Appendix B
of this report.

Table 8.5 - Cost Distribution for Major Capital Projects (2006 - 2009)
Cleveland Low 1st High 2nd High 3rd High
Capital Projects (2006 – 2009) 32.11% 6.18% 11.44% 29.26% 21.01%

The total distribution of capital spending for the years 1988 - 2009 shown in Tables 8.4 and 8.5
results in a total cost distribution shown below in Table 8.6. The total cost distribution was
calculated by using a weighted average of the two periods evaluated above (1998 – 2005 & 2006
– 2009).

Table 8.6 - Resulting Cost Distribution for FY10 Annual Debt Service Payment
Cleveland Low 1st High 2nd High 3rd High
Capital Projects (1988 – 2009) 30.44% 5.55% 13.29% 28.14% 22.59%
Existing Annual Debt Service 2010,
$27,291 $4,978 $11,913 $25,233 $20,255
$1,000s

The resulting cost allocation, based on historical capital project spending, shown in Table 8.6,
was used to distribute annual existing debt service requirement for 2010, totaling $89,668,856, to
each of the districts.

Future Capital Investment

The distribution of future capital investment was determined by reviewing CWD’s 10-year
Capital Improvement Program (CIP). The CIP includes over 70 capital projects and totals $656

MFSG 8-6 Cleveland Division of Water


million over the 10-year period (2010-2019). Each project was assigned a cost allocation factor
(Table 8.1) based on the nature and function of the project. It should be noted that custom
allocations were provided by CWD Engineering staff and used where appropriate. These
allocations are based on capital projects that serve a specific district. A full listing of future
capital projects and corresponding allocations can be found in the Appendix B of this report.
Table 8.7 below summarizes the results of the analysis.

Table 8.7 - Cost Distribution for Future Planned Major Capital Projects (2010 - 2019)
Cleveland Low 1st High 2nd High 3rd High
Capital Projects (2010 – 2019) 30.81% 5.60% 12.98% 27.77% 22.84%

The distribution of future capital investments shown in Table 8.7 is used to allocate the 2010
annual cost of future capital. Future capital expenses for 2010 total $12,068,853 and includes
cash funded capital projects and professional fees related to the issuing debt. The distribution of
future capital investment in 2010, to each district, is shown below.

Table 8.8 - Resulting Cost Distribution for 2010 Future Capital Expense
$1,000s Cleveland Low 1st High 2nd High 3rd High
Capital Projects (2010 – 2019) 30.81% 5.60% 12.98% 27.77% 22.84%
Future Capital (2010) $3,718 $676 $1,567 $3,352 $2,756

8.2.3 Gross Revenue Requirements

In this section the total costs allocated to each district are summarized and a unit rate is
calculated for each district. The relative comparison of each unit rate to the unit rate calculated
for the Cleveland district determines the cost of service rate differentials for each district. Table
8.9 summarizes the total cost, unit rate, and calculated rate differential for each rate district.

Table 8.9 - Summary of Total Cost, Unit Rate and Calculated Rate Differential (2010)
$1,000s Cleveland Low 1st High 2nd High 3rd High
Operating Expenses $38,172 $8,531 $18,343 $41,292 $30,486
Existing Debt Service $27,291 $4,978 $11,913 $25,233 $20,255
Future Capital Investment $3,718 $676 $1,567 $3,352 $2,756
Total Revenue Requirement $69,181 $14,185 $31,823 $69,876 $53,497
Total Billable Retail Flow (MCF’s) 1,862,300 459,503 810,416 1,467,546 920,047
Unit Rate ( $,000 / MCF) $0.037 $0.031 $0.039 $0.048 $0.058
Cost of Service Rate District Differentials 1.00 0.83 1.06 1.28 1.57

As shown in Table 8.9, the unit rates calculated for most suburban districts are higher than the
unit rate calculated for the Cleveland district. Due to operating similarities and shared services
within Low and 1st High (neither district requires secondary pumping), we recommend that these
two districts continue to be combined as a single rate district, Low/1st High. Table 8.10 shows
the differentials for each of the four rate districts, Cleveland, Low/1st High, 2nd High, and 3rd
High.

MFSG 8-7 Cleveland Division of Water


Table 8.10 - 2010 Cost of Service Results by Rate District
$1,000 Cleveland Low / 1st High 2nd High 3rd High
Total Revenue Requirement $69,181 $14,185 $31,823 $69,876
Total Billable Retail Flow (MCF’s) 1,862,300 1,269,920 1,467,546 920,047
Unit Rate ($,000/MCF) $0.037 $0.036 $0.048 $0.058
Cost of Service District Differentials 1.00 0.98 1.28 1.57

8.3 Cost of Service Ownership Surcharge

Customers inside the corporate limits of the City of Cleveland are responsible for paying all
operating and capital costs of the utility should the outside customers decide to no longer be
served by CWD. Therefore, CWD is entitled to a reasonable return from the non-owner
customers based on the value of the assets that are used and useful in providing water service and
for the financial risks taken as owners. In order to quantify the value of the return, the utility
basis approach is used. The utility basis approach is commonly used within the utility industry
to determine an appropriate return from non-owners and it complies with industry practice as
outlined in the American Water Works Association Manual M1, Principles of Water Rates, Fees,
and Charges.

8.3.1 Utility Basis Calculation

The utility basis revenue requirements include four major components summarized below:

• Operating and Maintenance Expenses – Operating and maintenance expenses are defined
by the CWD operating budget and are the same under both the utility and cash basis
revenue requirement calculations.

• Depreciation Expense – Rather than including the principal portion of debt service or
cash purchases of assets, the utility basis uses depreciation of system assets as a means of
recovering capital costs.

• Interest (debt) Expense – Interest Expense is simply the annual interest payments on
existing debt service.

• Return on System Equity – System equity is based upon the historical investments made
by CWD. The return on equity is calculated beginning with the value of the gross system
assets, less principal on existing debt, less contributed assets/grants (net of depreciation),
less cumulative depreciation of the assets, plus a working capital reserve (25% or 90-days
of operating and maintenance expenses) resulting in total system equity. A review of
rates of returns for regulated water utilities reveals rates of return anywhere between 7%
and 16%. Over the past year, for regulated utilities of similar size to CWD, an average
rate of return of 7.8% has been accepted and used by the Public Utilities Commission
(PUC) of Ohio. For purposes of this study, a 10% rate of return was used to calculate the
return on equity. Although the 10% rate of return is slightly higher than 7.8% quoted by
the PUC of Ohio, it is within the acceptable range and is appropriate for CWD based

MFSG 8-8 Cleveland Division of Water


upon the aggressive capital investment that has been made and as CWD continues to
improve and replace the water system.

Tables 8.11 and 8.12 summarize the gross system revenue requirements under both the cash and
utility basis.

Tables 8.11 and 8.12 Utility Basis vs. Cash Basis Revenue Requirements
Utility Basis Revenue Requirement, Cash Basis Revenue Requirement,
FY 10 FY 10
$1,000 $1,000
Operating Expenses $136,824 Operating Expenses $136,824
Depreciation Expense $43,790
Existing Debt Service $89,669
Return on Equity $44,487 Future Debt Service -
Interest Expense $41,312 Cash Funded Capital Expenses $12,069

Total Revenue Requirements $266,413 Total Revenue Requirements $238,561


Total Billable Retail Consumption Total Billable Retail Consumption
5,519,812 5,519,812
(MCF’s) (MCF’s)

Utility Basis Unit Rate ($,000/MCF) $0.048 Cash Basis Unit Rate ($,000/MCF) $0.043

The percent difference between the two unit rates shown in the table above is 10%. This means
that in FY10 suburban customers should be charged a 10% surcharge to pay for the benefit they
receive based on the net investment made by CWD in its water system infrastructure. Over a
five-year period, the utility basis calculation provides a unit rate differential ranging from 9% to
11%, averaging 10%. Table 8.13 shows the resulting rate differentials.

Table 8.13 Resulting Rate Differentials with Ownership Surcharge


$,000 Cleveland Low / 1st High 2nd High 3rd High
Cost of Service District Differentials 1.00 0.98 1.28 1.57
Cost of Ownership Surcharge 0.00 0.10 0.10 0.10
Rate District Differentials 1.00 1.08 1.38 1.67

8.3.2 Risk Premium

There are inherent business risks associated with any utility serving customers outside of its
corporate boundaries. In addition to the financial risks that are valued in the utility basis
surcharge calculated in the last section, there are operational and regulatory risks that CWD faces
as owner and operator of the CWD water system. These operating risks are difficult to value;
they deal with issues associated with worst case operating scenarios, including but not limited to
unfunded mandates with regard to water quality and emergency system repair and replacements.
As owner of the water system, CWD bears the burden of all risks (financial, legal and
operational) associated with environmental regulations, system security requirements, insurance
requirements, public health and safety and the prevention of water system contamination, and
funding of necessary capital reinvestment to continue operating at and enhancing the current
level of service. To compensate CWD for the unquantifiable business risks associated with

MFSG 8-9 Cleveland Division of Water


serving customers outside their corporate limits, a 20% risk premium should be added to the cost
of service differential for each rate district. Table 8.14 shows the resulting rate differentials for
each rate district with the risk premium.

Table 8.14 - Rate Differentials with Risk Premium


$,000 Cleveland Low / 1st High 2nd High 3rd High
Cost of Service District Differentials 1.00 0.98 1.28 1.57
Cost of Ownership Surcharge 0.00 0.10 0.10 0.10
Risk Factor 0.00 0.20 0.20 0.20
Rate District Differentials 1.00 1.28 1.58 1.87

The table shows the resulting and recommended rate differentials. Essentially, this table
proposes that CWD charge a 30% ownership differential (combination of the benefit of
ownership and risk surcharge) to the customers that are served outside of the City limits.
Typical surcharge differentials for other utilities vary from 50% - 75% for service to customers
outside of the utility owner’s corporate limits. In this case, CWD is charging a much lower
differential to its suburban customers.

8.4 Master Meter Cost of Service

Master meter communities are provided with water on a wholesale basis. CWD provides bulk
water to one or more meter locations that feed the master meter’s distribution system. CWD
serves five master meter communities. The communities are shown in Table 8.15 along with the
rate district which serves each community.

Table 8.15 - Master Meter Customer Flow and Rate District Information
Projected 2010Metered Flow
Service District
(MCFs)
Bedford 96,665 2nd High
Chagrin Falls 26,597 3rd High
Cleveland Heights 288,047 2nd High
Lakewood 263,838 Low / 1st High
Geauga County 13,632 3rd High
Total 688,779

Master meter communities own and maintain their own distribution systems and therefore should
not pay for operating and capital costs associated with CWD distribution services. Master meter
communities also provide their own customer service to the users of their distribution systems
and should not pay for costs associated with CWD customer service. Table 8.16 summarizes
2010 operating expenses and lists a percentage of each expense that master meter communities
should participate in funding. To explain further, this does not represent the total cost allocated
to master meter communities, but instead represents what percentage of total expenses that
master meter communities should help to pay in the water rate. For example, based on Table
8.16, master meter communities should contribute to 100% of operating expenses associated
with the CWD water plants, similarly to all other customers.

MFSG 8-10 Cleveland Division of Water


Table 8.16 - Percent of O&M Expenses that Master Meter Customers Should Pay ($1,000s):
Functional Group 2010 O&M Expenses Master Meter Contribution
Customer Account Services $10,617 0.00%
Plants 39,541 100.00%
Information and Technology 10,424 100.00%
Distribution and Maintenance 34,149 0.00%
Budget and Finance 2,330 100.00%
Water General 12,436 100.00%
Water Management 9,622 100.00%
Human Resources 3,853 100.00%
Engineering 13,853 100.00%
Total CWD O&M Expenses $136,824 67.28%

Table 8.16 reveals that in total master meter communities should receive a 33% discount or
reduction of the operating expense charged to a retail customer served by the same rate district.

A similar analysis was completed for capital costs. Major capital improvements to the CWD
distribution and customer service systems, both past and future, should be removed from the
capital expenses charged to master meter communities. A review of both past and future capital
projects showed that 26% of total capital investments are for enhancements and upgrades to the
water distribution or customer service systems. Therefore, master meter communities should
receive a 26% reduction of all capital expenses charged to a retail customer in the same rate
district.

Table 8.17 calculates a weighted average to show the total reduction of operating and capital
expenses.

Table 8.17 - Total % Reduction for Master Meter Customers ($1,000s):


FY10, $,000’s 2010 Expenses Master Meter Reduction
Total Operating Expenses $136,824 33%
Total Capital Expenses $101,737 26%
Total $238,561 30%

As demonstrated in Table 8.17, master meter communities should receive a 30% reduction; or in
other words, they should be charged 70% of the retail rates of the rate district in which they are
served.

8.5 Conclusion
This section presents recommendations to the current CWD rates and rate structure based on the
results of the cost of service analysis. The main objective of the cost of service analysis was to
evaluate the current rate differentials between each of the rate districts. The table below
summarizes the recommended differentials as compared to the current differentials. It also
proposes a phased-in approach to bring the rate differentials to the cost of service values over the
5-year planning period.

MFSG 8-11 Cleveland Division of Water


Table 8.18 - Recommended 5-year plan for Cost of Service Rate Differentials
Cost of Proposed Proposed Proposed Proposed Proposed
Current
Service 2011 2012 2013 2014 2015
Cleveland 1.00 1.00 1.00 1.00 1.00 1.00 1.00
st
Low / 1 High 1.55 1.30 1.55 1.49 1.43 1.36 1.30
nd
2 High 1.80 1.60 1.80 1.75 1.70 1.65 1.60
3rd High 2.06 1.85 2.06 2.01 1.96 1.90 1.85

A second objective of the cost of service analysis was to evaluate the cost of service for master
meter communities. In the current master meter / wholesale service agreements, it is stated that
master meter communities annual rate increases will be, at maximum, 75% of the increase
charged to retail customers in the service district serving the master meter community. Based
on the cost of service analysis, we would recommend that this value be changed to 70% to match
the cost of service. Additionally, the current 2010 master meter rates should remain in place
until the cost of service for a community matches 70% of the retail customer rates.

MFSG 8-12 Cleveland Division of Water


9.0 RATE STRUCTURE ALTERNATIVES

This chapter of the report presents an assessment of the current CWD water rate structure in light
of CWD goals and objectives for pricing the service and current customer usage patterns. The
section presents several rate structure alternatives that were considered during the course of the
study. The advantages and disadvantages of each alternative are discussed along with
justification for the recommended rate structure. The section also demonstrates the bill impact of
the recommended rate structure on CWD customers.

9.1 Pricing Objectives


To assist in the review of the current rate structure and development of alternative rate structures,
the project team conducted a pricing objectives workshop with CWD staff. To facilitate the
workshop, a listing of objectives identified by CWD in its request for proposals (RFP) for the
Comprehensive Financial Plan were reviewed by MFSG and augmented based on our industry
experience. The complete list of objectives is presented below.

• Cost of Service Recovery • Ease of Implementation


• Revenue Stability • Minimizing Customer Impacts
• Ease of Understanding • Affordability
• Conservation / Demand Management • Rate Stability
• Economic Development • Customer Retention
• Contribution from New Customers • Rate Equity
• Legality

The list of pricing objectives was reviewed to determine those that can realistically be met
through the implementation of a water rate structure. The objectives were also reviewed to
determine those that may not be relevant to the CWD system. Based on this review the
following objectives were identified as those that could not be achieved through alternative
means or those that are not particularly relevant to the CWD system.

• Conservation / Demand Management - The CWD water system has access to an abundant
supply of water and, given continued the negative financial impact that has resulted from
a decline in customer consumption; this objective was eliminated from consideration in
relation to the rate structure.

• Contribution from New Customers - CWD currently charges new customers for the costs
incurred in connecting to the water system. These charges are reviewed in Section 7 of
this report. Therefore, in terms of the water rate structure, contributions from new
customers are not relevant.

The remaining eleven objectives were reviewed with the CWD staff to discuss how each
objective can be achieved / influenced by the rate structure. The objectives and related rate
structure considerations are presented in Table 9.1.

MFSG 9-1 Cleveland Division of Water


Table 9.1 - Rate Structure Pricing Objectives and Modification Considerations
Objective Rate Structure Modification Considerations

• Setting rates and fees to fully recover cost of


providing service
Cost of Service Recovery - Ensure that the cost
of providing the service is recovered • Setting rates to ensure financial metrics are
met including debt coverage of 1.5 and
unencumbered cash reserves of $100 million
• Limiting the one-time changes to the rate
structure
Minimizing Customer Impact - Limit bill
increases
• Phasing in increases
• Transitioning to monthly billing
• Billing in gallons vs. MCFs
Rate Equity - Cost are allocated to customer
based on cost causation • Adjusting rates to match cost of service

• Increase the fixed portion of revenues


Revenue Stability - Limit changes in annual
revenues from rates and fees • Limit revenues that are dependent on
increasing customer consumption
Affordability* - Customer bills are affordable to • Providing a rate structure that provides a
low income households lifeline quantity of water at a minimal rate.
Customer Retention/System Expansion - • Set rates that are based on cost of service
Expand the CWD service area or serve customers • Examine opportunities for special rate classes
not currently served in current service area. based on the marginal cost of service.
Rate Stability - Limit the annual changes in rates • Limit or phase in changes to rate structure
and resulting customer bills • Conservatively set rates
• Limit changes to rate structure
Ease of Understanding - Rate structure is
understandable and not overly complex • Use of effective nomenclature for rates and
fees
Economic Development - Foster and maintain • Minimize bill impacts to commercial and
economic development industrial customers

Legality - Comply with all legal requirements • Utilize a rational basis for all rates and fees
Ease of Implementation - Minimize
administrative burden of implementing rate • Limit changes to rate structure
structure
*Affordability can be partially addressed through the rate structure but should be considered in terms of a complete
affordability program which is reviewed in Section 10.

While all of the objectives mentioned above are deemed important, there are several objectives
that were identified to be key:

• Revenue Stability - As mentioned throughout this report, declining water consumption


has historically and continues to have a significant impact on the financial health and

MFSG 9-2 Cleveland Division of Water


stability of CWD. Therefore the ability to stabilize revenues was identified as one of the
key objectives for any modifications to the current rate structure.

• Cost of Service Recovery - The rate structures must provide the revenues needed to
operate the system, provide for capital needs and meet the financial targets for long-term
financial health and stability.

• Minimizing Customer Impact - The direct impact to CWD customers should be


minimized, realizing that customer retention and continued water usage is critical for the
continued health and stability of the water system.

• Rate Equity - The rate structure should allocate costs equitably among the users of the
system. The rate structure should limit subsidies from one customer type / class to
another.

9.2 Current Rate Structure Observations


Prior to the development of alternative rate structures, the current water rate structure was
reviewed in light of the objectives and our industry expertise. The current water rate structure
for 2010 and currently in place for 2011 are presented in Table 9.2.

Table 9.2 - Current CWD Direct Service Water Rate Structure (2010 Rates)
Cleveland Low / 1st High 2nd High 3rd High
Quarterly Customer Service Charge $7.00 $7.00 $7.00 $7.00
Consumption Rates (per MCF)
1st MCF $12.58 $19.50 $22.64 $25.91
Additional MCFs $29.90 $41.50 $48.42 $55.41
Homestead $5.59 $8.66 $10.06 $11.52

Table 9.2 shows that the current rate structure consists of a quarterly customer service charge
(which is the same across all classes of customers and rate districts) and a water consumption
charge that varies depending on metered usage and location. Observations for each component
of the rate structure are discussed below. The observations are based on our industry expertise
and based on a rate comparison study that was completed which compares CWD’s current rates
and rate structure with similar utilities. The results of this study were used to determine if the
current rate structure used by CWD is in line with others and whether alternative structures could
be identified among CWD’s peers. The study can be found in Appendix C of this report.

Quarterly Customer Service Charge

• The quarterly customer service charge is intended to recover the cost associated with
customer service, billing, meter reading and collections. The current charge is set at the
level that recovers these costs (approximately $11 million annually).

MFSG 9-3 Cleveland Division of Water


• The current customer service charge generates approximately 4% of CWD’s total
revenues. The remaining 96% of revenues are dependent on customer water
consumption, resulting in significant revenue volatility.

• The revenue generated by the customer service charge as a percentage of total


revenues is extremely low compared to most utilities in the U.S.. Utilities typically
recover between 10% to 20% of their revenues from fixed charges. A significant
portion (approximately 80%) of the cost of providing CWD water service is fixed
and does not fluctuate with water demand.

• The current “customer service charge” should be renamed to “base fixed cost recovery
charge” to more aptly reflect its function.

Consumption Rates

• The current water rate structure can be viewed in two ways, as either an inclining block
rate structure which is intended to encourage customers to minimize water use or as a
standard usage rate structure with a “lifeline” quantity of water at a reduced rate. Based
on discussions with CWD staff, it is believed that the original intention of the structure
was to provide a “lifeline” quantity of water at a discounted rate.

• The current “lifeline” quantity of water of 1 MCF (7,480 gallons per quarter) is set at a
level that far exceeds what is typically defined as a lifeline quantity. The Environmental
Protection Agency (EPA) defines a minimum quantity of water of between 50 to 65
gallons per day per person. 1 MCF equates to approximate 85 gallons per person per day.

• The current 1st MCF rate is set at level that provides a 56% discount for the 1st MCF. As
demonstrated in Section 4, over 60% of residential customer accounts use 2 MCF or less,
meaning that 60% of residential customers receive a significantly discounted rate on at
least half of their water consumption.

• The current differential between the 1st MCF and additional MCFs is set at a high level
that causes volatility in revenues with changing water demand. This significant
differential discourages water consumption. The current differential between the blocks
is 2.14 times or 114%.

• The current Homestead rate provides a significant discount over regular rates which have
increased substantially over the last 20 years. The discount has increased from a 9%
discount on the 1st MCF in 1981 to a 56% discount today. Additional MCFs are currently
discounted 79%.

• The current 1st MCF and Homestead consumption rates are set at levels that are well
below the cost of providing water service. Table 9.3 presents the cost of providing water
service to each of the rate districts in comparison to the current consumption rates. The
table demonstrates that the 1st MCF and Homestead consumption rates are significantly
subsidized by the additional MCF consumption rate.

MFSG 9-4 Cleveland Division of Water


Table 9.3 - Cost of Service per MCF Compared to Current Consumption Rates
Cleveland Low / 1st High 2nd High 3rd High
Current Consumption Rates (per MCF)
1st MCF $12.58 $19.50 $22.64 $25.91
Additional MCF’s $26.90 $41.70 $48.42 $55.41
Homestead $5.59 $8.66 $10.06 $11.52
Cost of Service per MCF $22.64 $35.10 $40.76 $46.65

• The current rates do not match the calculated cost of service differentials presented in
Section 8.

The observations regarding the current rate structure demonstrate an opportunity for CWD to
modify the rate structure to better match the objectives described above. As a result of the
review of the current structure and discussions with CWD staff, several rate structure alternatives
were developed. However, prior to the presentation of the alternatives, several global
assumptions for all rate alternatives need to be provided. These are discussed in the next section.

9.3 Global Assumptions for All Rate Alternatives


The following assumptions are common to all of the rate alternatives presented in this section of
the report.

• Any rate alternative must generate sufficient revenue to fund revenue requirements
discussed in Section 3.

• The billable quantities of water and customer accounts for each rate alternative over the
study period are defined by the customer account and consumption demand forecast
presented in Section 5.

• CWD should annually maintain a minimum unencumbered cash balance (operating


reserve) of $100 million.

• CWD must annually meet a debt service coverage target on parity debt of 1.5.

• CWD makes annual escrow deposits of $10 million for debt service during the study
period.

• The estimated 2011 beginning total cash balance is $185 million.

• The estimated 2011 beginning unencumbered cash balance is ~ $94 million.

• CWD implements increases to the ancillary fees and charges as presented in Section 7
beginning July 1, 2011.

MFSG 9-5 Cleveland Division of Water


• Master meter customers are charged based on the cost of service analysis presented in
Section 8. The current master meter rates are kept in place until the rate is 70% of the
weighted average of the first MCF and additional MCF’s for the rates within the service
district in which they are served. The subsequent rates are based on 70% of the increase
in the rates within the service area in which they are served (using the weighted average
mentioned above).

• Based on the current agreement with East Cleveland, the current rates for East Cleveland
remain constant until 2013, at which time they should be adjusted to match standard
direct service suburban rates in place for 2013.

• Rates and fees are implemented on July 1, 2011. The revenues realized by CWD are
based on proration of usage rates and therefore CWD will generate revenues at the new
usage rates during approximately one-third of the year (in 2011) rather than a half year.
Increases in fixed charges are not prorated, it is assumed all bills generated after July 1,
2011 will be based on the new fixed charge. In subsequent years (2012 – 2015) usage
rate adjustments are also prorated but base fixed charges are not.

9.4 Alternative Rate Structures


Based on review of the current rate structure and in conjunction with objectives identified above,
several modifications to the rate structure were developed. The modifications to the various
components of the current water rate structure and the specific objective associated with each are
shown below.

• Increase the fixed customer service charge: Revenue Stability, Cost of Service Recovery

• Impose the fixed charge based on meter size: Revenue Stability, Cost of Service Recovery

• Reduce the “lifeline” quantity of water: Revenue Stability, Rate Equity

• Reduce the rate differential between the “lifeline” quantity of water (1st MCF block) and
additional MCFs: Revenue Stability, Rate Equity

• Reduce the Homestead discount: Rate Equity

• Implement cost of service differential for direct service suburbs: Rate Equity, Cost of
Service Recovery

The modifications are applied in various combinations to develop four rate alternatives for
consideration. For comparison purposes, maintaining the current rate structure is provided in
addition to the alternatives. It should be noted that maintaining the current rate structure
will result in not addressing any of the objectives mentioned above and implementing all of
the modifications will result in a rate structure that best accomplishes all the objectives.
The four rate structure alternatives include the following.

MFSG 9-6 Cleveland Division of Water


Alternative 1 - Increase the customer service charge and implement the fixed charge based on
meter size. Additionally change the name of the charge from “customer service charge” to “base
fixed cost recovery charge.”

Alternative 2 - Modify the direct service suburb rate differentials to cost of service.

Alternative 3 - Reduce the lifeline quantity of water (1st MCF block amount) and reduce the rate
differential between the first MCF of water and additional MCFs plus reduce Homestead rate
discount.

Alternative 4 - Phase-in all of the modifications described in Alternatives 1 - 3 over the study
period.

Table 9.4 provides a summary of the financial results for each of the rate alternatives including
average debt service coverage, average unencumbered cash reserves and average percentage of
fixed revenues.

Table 9.4 - Rate Alternative Financial Summary


Average Debt Average Average Cash Average Usage
Alternative Service Percentage of Reserves Rate Increase
Coverage Ratio Fixed Revenue (million)
Alternative 1 - Increased Fixed
1.72 15% $103 4.00%
Charge with basis on meter size

Alternative 2 - Implement cost of


service differentials (1.41, 1.88, 1.72 5% $100 6.40%
1.88)
Alternative 3 - Modify lifeline
quantity of water and block
1.75 5% $103 6.60%
differentials and reduce Homestead
discount

Alternative 4 - Phase-in all


1.72 13% $101 3.10%
modifications over study period

Current Rate Structure 1.76 5% $104 6.20%

Table 9.4 demonstrates that each of the alternatives will meet the financial metrics used for
evaluation. However this does not mean that each alternative will result in the desired
outcomes as defined above in terms of the main objectives for the rate structure.
Alternative 4 which includes all of the modifications provides the most significant progress
towards the desired objectives of revenue stability, rate equity and cost of service recovery.
The final main objective of minimizing customer impact is demonstrated in Tables 9.5 and 9.6.
Detailed projected operating results for each alternative rate structure are provided in Appendix
D. The rates and sample bills for all of the alternatives are provided in Appendix E.

Table 9.5 shows the impact of each alternative on a typical residential customer’s quarterly water
bill for a residential customer using 2 MCF per quarter with a 5/8” meter.

MFSG 9-7 Cleveland Division of Water


Table 9.5 - Typical Average Residential Customer Quarterly Bills at 2 MCF
Cleveland Low/1st High 2nd High 3rd High
2011* 2015 2011* 2015 2011* 2015 2011* 2015
Alternative 1 $59 $69 $81 $96 $91 $108 $101 $120

Alternative 2 $55 $74 $70 $92 $84 $110 $96 $125

Alternative 3 $56 $70 $83 $103 $95 $118 $108 $134

Alternative 4 $57 $84 $79 $102 $89 $119 $99 $133

Current Rate Structure $51 $63 $75 $92 $86 $105 $97 $119

Current Bill (2010) $46 $68 $78 $88


*Due to July 1, 2011 implementation of new rates customers would pay the amount for only half of the year.

Table 9.6 shows the impact of each alternative on a typical commercial customer’s quarterly
water bill for a commercial customer using 25 MCF per quarter with a 2” meter.

Table 9.6 - Typical Average Commercial Customer Quarterly Bills at 25 MCF


Cleveland Low/1st High 2nd High 3rd High
2011* 2015 2011* 2015 2011* 2015 2011* 2015
Alternative 1 $697 $842 $1,060 $1,283 $1,224 $1,483 $1,395 $1,691

Alternative 2 $804 $1,005 $1,043 $1,302 $1,282 $1,599 $1,482 $1,846

Alternative 3 $695 $864 $1,074 $1,334 $1,245 $1,548 $1,424 $1,770

Alternative 4 $694 $863 $1,056 $1,107 $1,221 $1,350 $1,392 $1,552

Current Rate Structure $732 $898 $1,130 $1,387 $1,311 $1,608 $1,499 $1,839

Current Bill (2010) $665 $1,027 $1,192 $1,363


*Due to July 1, 2011 implementation of new rates customers would pay the amount for only half of the year.

The following section of the report provides additional details on each of the rate alternatives
including the financial results under each alternative and a discussion of the advantages and
disadvantages of each of the alternatives. The specific rates and sample customer bills for each
alternative over the study period are presented in Appendix C.

9.4.1 Alternative 1 - Increase Fixed Charges Based on Meter Size

Alternative 1 focuses solely on modifications to the fixed portion of the current rate structure,
currently called the customer service charge. Alternative 1 includes an increase in the quarterly
customer service charge to recover a larger portion of total revenues on a fixed basis. The
alternative also proposes implementation of the fixed charge on a meter size basis. The meter
size basis is proposed due to the increased costs associated with maintaining, repairing and
replacing customer meters. CWD incurs significantly more cost when it replaces a large meter

MFSG 9-8 Cleveland Division of Water


compared to a smaller meter. A meter size based fixed charge is very common within the utility
industry with approximately 60% of utilities using this approach. In addition to increasing this
charge, it is proposed that the name be modified from “customer service charge” to “fixed cost
recovery charge”. The specific assumptions for Alternative 1 include the following:

• Increase the fixed charge to recover 15% of total revenues required in 2011.
• Increase the fixed charge annually over the period to maintain a level of 15% of revenues
recovered from the fixed charge.
• Impose the fixed charge based on meter size with the meter size equivalents based on the
ratio of costs of replacing the meter. The proposed ratios are shown in Table 9.7.

Table 9.7 - Fixed Charge Meter Size Ratios


Meter Size Averaged Meter Equivalents
5/8” 1.00
3/4” 1.00
1 1.00
1 ½” 4.23
2” 4.23
3” 19.96
4” 19.96
6” 37.63
8” 58.00
10” 73.41
12” 88.71

• Maintain all other aspects of current rate structure but with consumption rate increases of
4.0% in 2012 and 2013 and 6.0% annually in 2014 and 2015. The increase in the fixed
charge would allow consumption rates to remain unchanged in 2011.

The specific advantages and disadvantages to the implementation of Alternative 1 are discussed
in Table 9.8.

MFSG 9-9 Cleveland Division of Water


Table 9.8 - Alternative 1: Advantages and Disadvantages
Advantages Disadvantages

The increase in the fixed charge will provide The increase in the fixed charge to recover
for more stable revenues, making CWD less 15% of revenues in one year will result in a
reliant on water consumption. significant one-time increase in customer
bills in 2011.
Recovering a greater portion of revenues in a
fixed charge better reflects the cost of Imposing the fixed charge based on meter
providing the water service which is largely size will result in a significant one-time
fixed. increase in bills for customers with larger
meters.
Imposing the fixed charge based on meter size
increases the equity of the rate structure by
allocating a portion of the fixed cost of
operating the system based on the potential
demand related to a customers meter size.

As mentioned in Table 9.8, the primary advantage of Alternative 1 is the increase in the amount
of revenues that are collected from the fixed charge. This structure would increase fixed
revenues from less than 5% under the current structure to 15% under this alternative. This would
assist in the objective of increasing revenue stability. The application of the fixed charge based
on meter size would move the rate structure in the direction of greater rate equity by recovering a
greater portion of fixed charges from customers with larger meters. Due to the significant
increase in the fixed charge, Alternative 1 allows for modest increases in consumption rates.

The primary disadvantage of Alternative 1 is the one-time impact on customer bills, particularly
for customers who use a small amount of water. This is a result of the fixed charge being a
larger portion of the customer’s overall bill. Similarly, the alternative will have a potentially
significant impact on commercial customer bills, particularly those that have large meters and
use limited quantities of water. These customers are not typical and would have the option of
right-sizing their meter to a more appropriate size.

9.4.2 Alternative 2 - Implement Cost of Service Differentials for Direct Service Suburbs

Alternative 2 adjusts the rate differentials between the City of Cleveland and direct service
suburbs. The adjustments are made to match the calculated cost of service presented in Section
8. The specific assumptions for Alternative 2 include the following:

• Reduce the differential for Low/1st High from 1.55 to 1.30 in 2011.
• Reduce the differential for 2nd High from 1.80 to 1.60 in 2011.
• Reduce the differential for 3rd High from 2.06 to 1.85 in 2011.
• Maintain all other aspects of current rate structure but increase all water consumption
rates by 10.0% in 2011 and annually by 5.5% in 2012 - 2015.

MFSG 9-10 Cleveland Division of Water


The specific advantages and disadvantages to the implementation of Alternative 2 are discussed
in Table 9.9.

Table 9.9 - Alternative 2: Advantages and Disadvantages


Advantages Disadvantages

Adjustment of the rate differentials brings the The adjustment of the rate differentials
consumption rates in line with the cost of requires corresponding increases in City of
service as calculated in Section 8. Cleveland consumption rates, resulting in
significant increases in Cleveland customer
Adjustment of the rate differentials will reduce bills.
the impact of rate increases on direct service
suburb customers.

As mentioned in Table 9.9, the primary advantage of Alternative 2 is in the increase in rate
equity in terms of the allocation of costs among all users of the water system. The alternative
would set consumption rates at a level that matches the calculated cost of service. This would
reduce the consumption rates for all direct service suburb customers. As a result, City of
Cleveland customers would experience significant consumption rate increases. The customer
bill impacts to Cleveland customers would be significant because of the one-time jump in
consumption rates as rates are adjusted to cost of service in 2011. Historically, CWD has
addressed adjustments to cost of service differentials by phasing-in changes over a period of
time.

Alternative 2 would have limited impact on revenue stability and cost of service recovery. While
the rates are set to recover the cost of service, CWD would still be collecting approximately 96%
of revenues from the consumption rate and therefore subject to significant revenue volatility.

9.4.3 Alternative 3 - Modify Lifeline Quantity of Water and Block Differentials and Reduce
Homestead Discount

Alternative 3 modifies several aspects of the current consumption charge part of the rate
structure. This alternative reduces the quantity of water in the first consumption block to better
match a lifeline quantity of water. The alternative reduces the rate differential between the first
unit of water and the additional units and reduces the discount provided in the Homestead rate.
The specific assumptions for Alternative 3 include the following:

• Reduce the first quantity of water from 1 MCF to 0.6 MCF in 2011.
• Reduce the rate differential between the first unit of water and additional units from 2.14
to 1.75 in 2011.
• Reduce the rate discount provided in the Homestead rate from 56% to 35%.
• Maintain all other aspects of the current rate structure but increase all water consumption
rates by 10.5% in 2011, 6.0% in 2012 and 5.5% annually in 2013 - 2015.

MFSG 9-11 Cleveland Division of Water


The specific advantages and disadvantages to the implementation of Alternative 3 are discussed
in Table 9.10.

Table 9.10 - Alternative 3: Advantages and Disadvantages


Advantages Disadvantages

Reduction of the first quantity of water to 0.6 Modifications to the quantity of water in the
MCF provides a more realistic lifeline quantity first block and block differential will result
of water. in the potential for higher percentage
increases in water bills for small water users.
Reduction of the first quantity of water reduces
the required consumption rate increases in Reduction of the discount provided by the
2011. Homestead rate will result in increases in
water bills for Homestead customers.
Reduction of the rate differential between the
blocks will help to equalize the two blocks
which will reduce revenue volatility, reduces
the subsidy from the additional quantities of
water and encourages the use of water.

Reduction of the discount provided by the


Homestead rate reduces the subsidy required
from other users and restores the discount to
historical levels.

As mentioned in Table 9.10, there are several advantages associated with Alternative 3. The
alternative would set the lifeline quantity of water to a more appropriate level. This modification
will assist in holding down the consumption rates in 2011, helping to minimize customer impacts.
The reduction of the differential between the usage blocks will provide greater revenue stability
and increase rate equity as the subsidy provided to the “lifeline” rate by the additional MCF’s is
reduced. The reduction of the discount provided by the Homestead rate will also provide greater
rate equity as the subsidy from other consumption rates is also reduced.

Alternative 3 would have a more significant impact on customers that use water in the range of 1
to 3 MCF per quarter. The alternative would also result in greater increases to Homestead
customers. Alternative 3 would have limited impact on revenue stability and cost of service
recovery. While the rates are set to recover the cost of service, CWD would still be collecting
approximately 96% of revenues from the consumption rate and therefore subject to significant
revenue volatility.

MFSG 9-12 Cleveland Division of Water


9.4.4 Alternative 4 - Phase-In All Modifications between 2011 and 2015

Alternative 4 encompasses all of the modifications to the rate structure presented in Alternatives
1, 2 and 3. However, the modifications are phased-in over the study period. The specific
assumptions for Alternative 1 include the following:

• Increase the fixed customer service charge effective July 1, 2011 and call it the “base
fixed cost recovery charge.”
• Impose the fixed charge based on meter size as outlined in Section 9.4.1.
• Implement cost of service differentials for direct service suburbs by 2015 by reducing the
differential over the period 2012 – 2015, as presented in Section 8, Table 8.18.
• Beginning in 2012 reduce the lifeline quantity of water to 0.6 MCF and phase in a
reduction in the rate differential between the first unit of water and additional units from
2.14 to 1.75 by 2015.
• Beginning in 2012 reduce the Homestead rate discount from 56% to 35% by 2015 with
equal annual adjustments over the study period.
• Do not increase water consumption rates in 2011, but increase them by 5.5% in 2012, by
5% in 2013, by 4% in 2014 and by 3% in 2015.

The specific advantages and disadvantages to the implementation of Alternative 4 are discussed
in Table 9.11.

Table 9.11 - Alternative 4: Advantages and Disadvantages


Advantages Disadvantages

The increase in the fixed charge will provide Imposing the fixed charge based on meter
for more stable revenues, making CWD less size will result in a significant one-time
reliant on water consumption. increase in bills for customers with larger
meters.
Recovering a greater portion of revenues in a
fixed charge better reflects the cost of The phase-in of the rate differentials requires
providing the water service which are largely corresponding phased-in increases in City of
fixed. Cleveland consumption rates, resulting in
larger increases in Cleveland customer bills
Imposing the fixed charge based on meter size over the study period.
increases the equity of the rate structure by
allocating a portion of the fixed cost of Modifications to the quantity of water in the
operating the system based on the potential first block and block differential will result
demand related to a customer’s meter size. in the potential for higher percentage
increases in water bills for small water users.
Adjustment of the rate differentials brings the
consumption rates in line with the cost of Reduction of the discount provided by the
service as calculated in Section 8. Homestead rate will result in increases in
water bills for Homestead customers.
Adjustment of the rate differentials will reduce

MFSG 9-13 Cleveland Division of Water


Advantages Disadvantages
the impact of rate increases on direct service
suburb customers.

Reduction of the first quantity of water to 0.6


MCF provides a more realistic lifeline quantity
of water.

Reduction of the first quantity of water


decreases the required consumption rate
increases in 2011.

Reduction of the rate differential between the


blocks will help to equalize the two blocks
which will reduce revenue volatility, reduces
the subsidy from the additional quantities of
water and encourages the use of water.

Reduction in the discount provided by the


Homestead rate reduces the subsidy required
from other uses and restores the discount to
historical levels.

Alternative 4 represents a combination of all of the modifications included in Alternatives 1, 2


and 3, and as a result most of the advantages and disadvantages associated with each are present
in Alternative 4. The one primary difference is that since the changes are phased in over the
study period the advantages to the modifications are not realized as quickly. On the other hand,
the phase-in reduces any of the one-time negative impacts to customers as a result of the
changes.

Alternative 4 provides adjustments to the current rate structure that specifically address each of
the objectives. The structure provides increases to revenue stability by increasing the fixed
charge and reducing the differential between the consumption blocks. The structure provides
increased rate equity by adopting cost of service differentials for direct service suburban
customers and by reducing the subsidy provided to the lifeline rate and Homestead rate. There is
also rate equity for basing the fixed charge on meter size as well. The structure minimizes
customer impact by phasing in adjustments over the study period. Alternative 4 imposes the
lowest increases in the consumption rates of any of the alternatives. The structure provides cost
of service recovery by setting rates at a level that fully recovers costs.

9.4.5 Current Rate Structure

The current rate structure is presented to provide a comparison with the alternatives. The
specifics of the current rate structure are presented in Section 9.2. The following assumptions
were used to project the current rate structure over the study period.

MFSG 9-14 Cleveland Division of Water


• Increase the quarterly customer service charge annually based on the cost of providing
customer service.
• Increase all water consumption rates by 10.0% in 2011, 6% in 2012 and 2013 and 5%
annually in 2014 - 2015.

The specific advantages and disadvantages associated with maintaining the current rate structure
are discussed in Table 9.12.

Table 9.12 - Current Rate Structure: Advantages and Disadvantages


Advantages Disadvantages

Limit customer impact associated with changes The current structure would not provide
to the rate structure increased revenue stability or rate equity.
Specific disadvantages are listed in Section
Easy to implement 9.2.

The primary advantage to maintaining the current rate structure is that it results in limited
change, which is positive for customer understanding and implementation purposes. However,
the advantage of consistency is far outweighed by significant disadvantages associated with
maintaining the current structure. As discussed at length in this section of the report, the current
rate structure fails to meet CWD pricing objectives in a number of areas including revenue
stability and rate equity. The structure will provide cost of service recovery and to some degree
minimizes customer impact in the short term. However with continued declining water
consumption, the business model represented by the current rate structure will lead to greater
revenue volatility, more significant future rate increases and resulting customer bill impacts.

9.5 Recommended Rate Alternative (#4)


Based on the detailed review of each of the rate structure alternatives, Rate Alternative 4 is
recommended for adoption and implementation. This structure is recommended because it
assists in meeting all of the key objectives identified by CWD management as being most
important.

• Revenue Stability - Alternative 4 will increase revenue stability by increasing the


portion of revenues that are recovered from the fixed charge. By the end of the study
period, approximately 17% of revenues will be recovered from the fixed charge.
Increases in the fixed charge will result in less dependency on water consumption.
Alternative 4 also provides increased revenue stability by reducing the differential
between the first unit of water and additional MCF’s.

• Rate Equity - Alternative 4 will provide greater equity among users of the CWD system.
This is accomplished through the phased-in implementation of direct service suburb rate
differentials which match the calculated cost of service in Section 8. The reduction in the
differential between the “lifeline” unit of water and additional units provides greater rate
equity as the subsidy provided to the “lifeline” quantity rate is reduced. Similarly, the

MFSG 9-15 Cleveland Division of Water


reduction in the discount provided to Homestead customers results in less of a subsidy
from the other consumption rates.

• Minimize Customer Impact - While impacts to CWD customers are inevitable given the
need to increase revenues, Alternative 4 assists in minimizing the impact by phasing in
the changes and increases over the study period. Additionally over the long-term the
move towards an increased portion of revenues that are fixed should help temper rate
increases due to declining consumption.

• Cost of Service Recovery - The Alternative 4 rate structure will provide revenues that
meet CWD operating expenses, capital requirements and outstanding liability, as detailed
in the revenue requirements in Section 3. Due to increased revenue stability, the ability
to accurately predict revenues is increased under Alternative 4 as compared to the other
alternatives, which should result in a greater certainty of cost recovery.

The results of operations for Alternative 4 are shown in Table 9.13. The results of operation
reveal that under Alternative 4, CWD would maintain $100 million in cash annually except for
2012. The results demonstrate that CWD would meet the debt service coverage ratio target of
1.5 every year except 2011 when it is 1.39. Overall, the adoption of Alternative 4 rates would
provide financial health and stability based on the assumptions used for the study period.

Table 9.13 - Projected Results of Operation for Alternative 4


($1,000s) 2011 2012 2013 2014 2015
Revenues from Water Sales 220,835 233,558 241,529 249,251 255,444
Miscellaneous Revenues 14,275 14,625 14,915 15,244 15,573
Interest Income 4,170 4,445 4,709 5,103 5,543
Private Fire Protection 4,655 4,866 4,920 4,990 5,181
a Total Revenues $243,936 $257,493 $266,073 $274,587 $281,741
b Total O&M Expenditures 141,158 148,026 150,898 154,947 157,965
c Net Revenue for Debt Service (a-b) 102,778 109,467 115,175 119,640 123,777

d Existing Debt Service(1) 83,224 75,523 71,138 68,269 66,318


(1)
d Projected Debt Service - - 4,726 4,726 10,311
Escrow Deposit 9,979 10,000 10,000 10,000 10,000
Total Debt Service Expenditures 73,245 65,523 65,864 62,995 66,629

Debt Service Coverage (c / d) 1.40 1.67 1.75 1.90 1.86

e Beginning Cash Balance 185,341 185,338 179,738 179,696 184,133


f Revenues 238,533 252,160 260,581 268,800 275,768
g Expenditures 238,536 257,760 260,623 264,364 274,489
h Ending Cash Balance (e + f - g) 185,338 179,738 179,696 184,133 185,412

i Less Liabilities 6,033 6,396 6,614 6,680 6,431

MFSG 9-16 Cleveland Division of Water


($1,000s) 2011 2012 2013 2014 2015
j Less Reserve for Pre-Encumbrances 55,601 53,921 53,909 55,240 55,624
k Less Reserve for Encumbrances 18,534 17,974 17,970 18,413 18,541
Total Reserves 74,135 71,895 71,878 73,653 74,165

Unencumbered Cash Balance End of


l 105,170 101,446 101,204 103,799 104,816
Year (h – [i + j + k])

m Unencumbered Cash Target 100,000 100,000 100,000 100,000 100,000


Excess Fund Balance (l – m) 5,170 1,446 1,204 3,799 4,816
(1)
Represents existing and future parity indebtedness and excludes subordinate debt as specified in the coverage
calculation in the Existing Bond Indenture.

The recommended rates under Alternative 4 are shown in Tables 9.14 and 9.15 for the study
period.

Table 9.14 - Recommended Rates (Quarterly Billing) 2011 - 2015


Rate District 2011 2012 2013 2014 2015
All Customers Meter Size
Base Fixed Cost
5/8”, 3/4”, 1” $18.00 $18.00 $21.00 $24.00 $27.00
Recovery Charge*
1 ½”, 2” $36.00 $36.00 $41.00 $47.00 $53.00
3”, 4” $120.00 $120.00 $140.00 $160.00 $180.00
6” $220.00 $220.00 $250.00 $290.00 $320.00
8” $330.00 $330.00 $380.00 $430.00 $480.00
10” $410.00 $410.00 $480.00 $540.00 $610.00
12” $500.00 $500.00 $570.00 $650.00 $730.00
*Fixed charge for compound meter based on larger size
Cleveland Rates shown in $ per MCF
(1)
Regular 0 - 0.6 MCF $12.58 $13.76 $15.51 $17.34 $19.26
Additional MCFs $26.90 $27.52 $29.48 $31.22 $32.74
Homestead All MCF's $5.59 $6.88 $8.53 $10.41 $12.52

Direct Service Suburbs


Low / 1st High
Regular 0 - 0.6 MCF(1) $19.50 $20.47 $22.11 $23.63 $25.04
Additional MCFs $41.70 $41.70 $42.01 $42.53 $42.56
Homestead All MCF's $8.67 $10.23 $12.16 $14.18 $16.27

2nd High

MFSG 9-17 Cleveland Division of Water


Rate District 2011 2012 2013 2014 2015
(1)
Regular 0 - 0.6 MCF $22.64 $24.08 $26.38 $28.62 $30.82
Additional MCFs $48.42 $48.42 $50.11 $51.51 $52.39
Homestead All MCF's $10.06 $12.04 $14.51 $17.17 $20.03

3rd High
Regular 0 - 0.6 MCF(1) $25.91 $27.62 $30.33 $33.00 $35.63
Additional MCFs $55.41 $55.41 $57.63 $59.39 $60.57
Homestead All MCFs $11.52 $13.81 $16.68 $19.80 $23.16

Master Meter Communities


Bedford All MCFs $31.54 $31.54 $31.54 $32.53 $33.35
Chagrin Falls All MCFs $35.76 $35.76 $36.14 $37.51 $38.56
Cleveland Heights All MCFs $31.50 $31.50 $31.50 $32.53 $33.35
Lakewood All MCFs $27.10 $27.10 $27.10 $27.10 $27.10
Geauga County All MCFs $38.72 $38.72 $38.72 $38.72 $38.72
Emergency Standby Suburbs
Berea All MCFs $39.44 $39.44 $39.44 $39.44 $39.44
Lake County All MCFs $38.36 $38.36 $38.36 $38.36 $38.36
Lorain County All MCFs $39.44 $39.44 $39.44 $39.44 $39.44
North Ridgeville All MCFs $31.41 $31.41 $31.41 $31.41 $31.41
Medina County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Summit County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Hudson All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Portage County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
(1)
Usage block change to 0.6 MCF would occur in 2012.

As mentioned previously, the rates for the master meter communities are based on the cost of
service analysis presented in Section 8. The rates have been set at a level that is 70% of the rate
for the direct service rate district serving the community. This represents a change from the
current differential of 75%. The current rates for emergency standby suburbs were also
evaluated and based our analysis we recommend that the current standby rates remain in place
over the planning period.

At some point in the future, CWD may bill customers on a monthly basis rather than the current
practice of billing them on a quarterly basis. This is becoming more common within the utilities
industry as a customer convenience, to improve cash flow and assist with affordability. The
proposed rates from Table 9.14 are shown in Table 9.15 assuming monthly billing.

MFSG 9-18 Cleveland Division of Water


Table 9.15 - Recommended Rates (Monthly Billing) 2011 - 2015
Rate District 2011 2012 2013 2014 2015
All Customers Meter Size
Fixed Charge* 5/8”, 3/4”, 1” $6.00 $6.00 $7.00 $8.00 $9.00
1 ½”, 2” $12.00 $12.00 $14.00 $16.00 $18.00
3”, 4” $40.00 $40.00 $47.00 $53.00 $60.00
6” $73.00 $73.00 $83.00 $97.00 $107.00
8” $110.00 $110.00 $127.00 $143.00 $160.00
10” $137.00 $137.00 $160.00 $180.00 $203.00
12” $167.00 $167.00 $190.00 $217.00 $243.00
*Fixed charge for compound meter based on larger size
Cleveland Rates shown in $ per MCF
(1)
Regular 0 - 0.2 MCF $12.58 $13.76 $15.51 $17.34 $19.26
Additional MCFs $26.90 $27.52 $29.48 $31.22 $32.74
Homestead All MCF's $5.59 $6.88 $8.53 $10.41 $12.52

Direct Service Suburbs


Low / 1st High
Regular 0 - 0.2 MCF(1) $19.50 $20.47 $22.11 $23.63 $25.04
Additional MCFs $41.70 $41.70 $42.01 $42.53 $42.56
Homestead All MCF's $8.67 $10.23 $12.16 $14.18 $16.27

2nd High
Regular 0 - 0.2 MCF(1) $22.64 $24.08 $26.38 $28.62 $30.82
Additional MCFs $48.42 $48.42 $50.11 $51.51 $52.39
Homestead All MCF's $10.06 $12.04 $14.51 $17.17 $20.03

3rd High
Regular 0 - 0.2 MCF(1) $25.91 $27.62 $30.33 $33.00 $35.63
Additional MCFs $55.41 $55.41 $57.63 $59.39 $60.57
Homestead All MCFs $11.52 $13.81 $16.68 $19.80 $23.16

Master Meter Communities


Bedford All MCFs $31.54 $31.54 $31.54 $32.53 $33.35
Chagrin Falls All MCFs $35.76 $35.76 $36.14 $37.51 $38.56
Cleveland Heights All MCFs $31.50 $31.50 $31.50 $32.53 $33.35
Lakewood All MCFs $27.10 $27.10 $27.10 $27.10 $27.10

MFSG 9-19 Cleveland Division of Water


Rate District 2011 2012 2013 2014 2015
Geauga County All MCFs $38.72 $38.72 $38.72 $38.72 $38.72
Emergency Standby Suburbs
Berea All MCFs $39.44 $39.44 $39.44 $39.44 $39.44
Lake County All MCFs $38.36 $38.36 $38.36 $38.36 $38.36
Lorain County All MCFs $39.44 $39.44 $39.44 $39.44 $39.44
North Ridgeville All MCFs $31.41 $31.41 $31.41 $31.41 $31.41
Medina County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Summit County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Hudson All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Portage County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
(1)
Usage block change to 0.2 MCF would occur in 2012.

9.6 Customer Bill Comparisons


To demonstrate the impact of the recommended rate structure alternative, several comparisons
are provided. Appendix E presents sample customer bills for all of the alternatives considered.
Table 9.16 presents a sample residential and commercial bill in the City of Cleveland and the
associated bill impacts as a result of each of the changes to the rate structure. Several of the
modifications to the rate structure do not take place until 2012 and therefore Table 9.16 shows
the calculated bill for 2011 and 2012 once the modifications have taken place.

Table 9.16 - Residential and Commercial Customer Bill Impacts of Recommended Structure
Residential Customer Commercial Customer
City of Cleveland Average Customer
5/8” Meter - Using 2 MCF 2” Meter - Using 25 MCF
Current Quarterly Water Bill 2010 $46.48 $665.18

Increase Due to Fixed Cost Recovery Charge $11.00 $29.00

Calculated Quarterly Water Bill 2011 $57.48 $694.18

Increase Due to Fixed Cost Recovery Charge $- $-


Reduction in Lifeline
$5.73 $5.73
Block to 0.6 MCF
Usage Rate Increase $1.02 $4.34

Impact of Usage Rate Rate Differential for


$0.31 ($3.07)
Changes Additional MCFs
Reduction in Homestead
($0.13) ($0.48)
Discount
Cost of Service
$0.38 $15.10
Differentials
Calculated Quarterly Water Bill 2012 $64.79 $715.80

MFSG 9-20 Cleveland Division of Water


The bills presented in Table 9.16 are determined using the current billing cycle, which is
quarterly. One of the benefits of the implementation of Automatic Meter Reading (AMR) is the
ability to efficiently and cost effectively bill customers on a more frequent basis. Based on
discussions with CWD staff, the option of monthly billing will be strongly considered. Our
project team would encourage CWD to move to monthly billing. Table 9.17 presents the a
comparison of quarterly bills under Alternative 4 for residential customers using 2 MCF and
commercial customers using 25 MCF in the City of Cleveland and direct service suburbs.

Table 9.17 - Comparison of Quarterly Bills


Residential Commercial
Quarterly Bill (1)
(1) (2)
2011 2011 2012 2013 2011 2011(2) 2012 2013
City of Cleveland $47 $57 $65 $72 $665 $694 $716 $770
st
Low/1 High $68 $79 $89 $93 $1,027 $1,056 $1,066 $1,079
2nd High $78 $89 $100 $107 $1,192 $1,221 $1,232 $1,280
rd
3 High $88 $99 $112 $120 $1,363 $1,392 $1,405 $1,465
(1)
Represents current bill
(2)
Assuming July 1, 2011 adoption of proposed rates.

Exhibit 9.1 provides a summary of a bill comparison of the current 2010 rates and the proposed
rates for 2011 and 2012 to surrounding communities in the region. The bills are calculated for a
City of Cleveland residential customer with a 5/8” meter using 2 MCF per quarter.

Exhibit 9.1 - Quarterly Residential Bill Comparison for 2 MCF - City of Cleveland Customer
















*Based on current rates


**Based on proposed rates in place beginning July 1, 2011

Exhibit 9.1 demonstrates that among comparable utilities the current residential customer bill is
the middle to upper end of the range of utilities for residential customers using 2 MCF per
quarter. The exhibit demonstrates that with the proposed increases, the residential customer bill
MFSG 9-21 Cleveland Division of Water
will move towards the higher end of the scale. However, it is very important to note that the bill
comparisons shown in Exhibit 9.1 represent current water rates for the comparison utilities. The
water rates and the resulting bills for the comparison utilities in 2011 and 2012 are not yet
known. A comparison of commercial bills is shown in Exhibit 9.2 for a commercial customer in
the City of Cleveland with a 2” meter using 25 MCF per quarter.

Exhibit 9.2 - Quarterly Commercial Bill Comparison for 25 MCF - City of Cleveland Customer














*Based on current rates


**Based on proposed rates in place beginning July 1, 2011

Exhibit 9.2 shows that commercial customer bills are distributed similar to residential bills for
the comparable utilities.

As described above the recommended alternative includes a fixed charge based on meter size.
Table 9.18 provides a comparison of the fixed charges imposed by the comparable utilities. It
should be noted that of the comparable utilities that charge a fixed charge all but one (Akron,
OH) or 93% impose the charge using a meter size basis.

MFSG 9-22 Cleveland Division of Water


Table 9.18 - Fixed Quarterly Charge Comparison(1)
Meter Size
5/8” 3/4” 1” 1 ½” 2” 3” 4” 6” 8” 10” 12”
Cleveland,
$7 $7 $7 $7 $7 $7 $7 $7 $7 $7 $7
OH (current)
Akron, OH $11 $11 $11 $11 $11 $11 $11 $11 $11 $11 $11
Washington
$12 $12 $14 $23 $231 $412 $804 $970 $954 $989 $1,048
DC
Cincinnati,
$12 $21 $28 $37 $52 $121 $211 $413 $616 $834 $982
OH
Detroit, MI $13 $20 $33 $66 $105 $210 $328 $656 $1,049 $1,508 $2,032
Madison,
$13 $15 $22 $28 $35 $52 $83 $124 $212 $327 $482
WI
Erie, PA $15 $15 $30 $55 $85 $165 $256 $507 $808 $1,160 $1,662
Pittsburgh,
$15 $26 $50 $98 $153 $329 $585 $1,411 $2,435 $4,179 N/A
PA
Milwaukee,
$16 $16 $44 $92 $146 $288 $527 $960 $1,561 $2,178 $3,455
WI
Philadelphia,
$18 $21 $27 $42 $62 $106 $184 $356 $555 $806 $1,406
PA
Cleveland
$18 $18 $18 $36 $36 $120 $120 $220 $330 $410 $500
(Proposed)
Columbus,
$18 $18 $19 $28 $60 $76 $118 $345 $503 $858 $879
OH
Louisville,
$19 $19 $48 $97 $155 $339 $581 $1,355 $2,419 $3,677 $5,612
KY
Toledo $21 $32 $54 N/A N/A N/A N/A N/A N/A N/A N/A
St. Louis,
$24 $28 $35 $51 $74 $144 $255 $486 $741 $1,018 N/A
MO
Indianapolis,
$27 $34 $38 $64 $101 $185 $264 $510 $805 $1,150 N/A
IN
Buffalo, NY $31 $44 $77 $155 $247 $464 $773 $1,546 $2,507 $3,555 N/A
(1)
Some utilities bill on a monthly basis and therefore the fixed charges was converted to a quarterly charge
for comparison purposes.

Table 9.18 demonstrates that the current fixed charge is the lowest of any of the comparable
utilities. The proposed fixed charge will place the 5/8” meter size charge in the middle of the
range. The table also shows that the proposed fixed charge for larger meters in the 6” to 12”
range is significantly lower than the comparable utilities.

9.7 Summary
The rate structure utilized by CWD has evolved over a number of years. As a result it is
necessary to periodically evaluate the appropriateness of the structure in light of changes in
operating conditions, customer usage patterns and specific objectives defined by CWD. Based
on our review of the current structure, CWD has an opportunity to modify the current structure to
more appropriately match its objectives and address changes in the system. Specifically we

MFSG 9-23 Cleveland Division of Water


recommend that CWD adopt the Alternative 4 rate structure and implement the rates presented in
Table 9.14. The Alternative 4 rate structure will specifically address:

• Revenue stability by increasing the percentage of revenues recovered from the fixed
charge and reducing the differential between the first unit of water and additional MCFs.

• Rate Equity by a phased-in implementation of direct service suburb rate differentials, by


reducing the differential between the “lifeline” unit of water and additional units and by
reducing the Homestead discount.

• Customer Impact by phasing-in the modifications to the rate structure over the study
period.

• Cost of Service Recovery by providing the revenues necessary to fully fund the operations
of CWD.

MFSG 9-24 Cleveland Division of Water


10.0 AFFORDABILITY PROGRAM

This chapter of the report presents a review and assessment of CWD’s current affordability
program and presents recommendations to enhance the current program. The affordability
program assessment was completed by David Hasson Ph.D. working as sub-consultants to the
MFSG project team. Dr. Hasson completed the review of the program and authored the majority
of this chapter of the report.

10.1 Overview
The cost of operating, maintaining and replacing water and wastewater infrastructure has been
escalating rapidly for the past 10 to 20 years. This trend has been a result of numerous factors,
but one of the major factors has been aging infrastructure that requires more costly maintenance
and is more likely to need replacement than in prior decades. In addition, federal and state
regulatory requirements have added financial responsibilities to local utilities with little financial
assistance since the end of the EPA Construction Grants Program. As a result many municipal
utilities have been forced to raise rates faster than the general rate of inflation, which in turn has
caused affordability issues for an increasing number of ratepayers. This phenomenon has been
exacerbated by the precipitous economic downturn that began in 2008. The combination of
increasing utility rates, flat or declining incomes (including increased unemployment) and
savings that have been diminished or depleted by the economic collapse has made affordability
assistance a necessity for many water and wastewater utilities. This assistance is critical on
many fronts, including but not limited to:

• A means of providing essential human services at a cost that the vast majority of
ratepayers can afford;
• A means of minimizing revenue loss to the utility, because the collection of some
revenue for services provided is much preferred to collecting no revenue from an account
that eventually becomes a bad debt;
• A means of controlling costs, because shutting off water service for non-payment is
typically a very costly function, as is the cost of eventually turning it back on at some
future date;
• A means of meeting the political objectives of elected officials who want publicly
provided services to be available and affordable, and who are understandably concerned
when government actions result in service shut-offs, penalties, and other difficult
enforcement actions; and
• A means of enhancing public health through the use of safe, publicly provided water and
wastewater services.

The following discussion offers observations on CWD’s affordability assistance program,


identifies a wide array of options that might be used to enhance, expand, and/or replace the
features of the existing program, and provides recommendations for affordability program
elements from within the identified options. The objective is to provide CWD with ideas for a
comprehensive assistance program that reaches out more effectively to those who need financial

MFSG 10-1 Cleveland Division of Water


assistance, addresses the needs of those who are not covered by the current program, and
hopefully achieves some financial benefit to CWD as well.

10.2 The Need for Assistance


Based on both the 2000 US Census and other more recent information, there is apparent need for
CWD to offer an assistance program to address the affordability concerns of a segment of its
customer base. The Census numbers state that in the Cleveland PMSA 28.3 percent of the
households had income less than $25,000 annually. About 8.2 percent of all families were
officially defined as being in “poverty status,” and 4.2 percent of households were receiving
public assistance income. Information reported on the Cleveland.com web site (which has not
been independently verified in this report) stated that the 2007 median household income of the
Cleveland metropolitan area was $28,500. This compared to the State of Ohio median of
$46,600 and the national MHI of $50,200. If these statistics are accurately reported, they
strongly suggest that the CWD service area has affordability challenges for both homeowners
and renters.

Because the need for infrastructure investments is already substantial and growing, and because
rising costs and rates are affecting customers and utilities alike, there are good reasons for
implementing an effective utility assistance program. However, there are also a number of
disadvantages of these programs that need to be kept in mind when implementing a new
program, expanding or enhancing an existing program and when monitoring a program for its
effectiveness and efficiency. Some of these advantages and disadvantages are discussed in Table
10.1.

Table 10.1 Advantages and Disadvantages of Municipal Utility Assistance Programs


Advantages Disadvantages
Enable nearly all members of the
Equity issues; most ratepayers subsidize the
community to afford a basic, essential level
service provided to a small subset of ratepayers
of water or wastewater service
Add to the rate increases of other users, and
Meet community social objectives thereby increase the potential that additional
customers may be unable to afford service
Inconsistent with conservation and efficient
Enhances overall public health water use by diminishing the price signal to
some users
Potentially enhance revenue because Creates controversy about the proper role of
collection of discounted bills is preferable governments in general, and utilities in particular, as
to non-payment by customers agents of social policy and income redistribution

Reduce collection costs


Reduce costs of field crews for shutoffs
and turn-ons

MFSG 10-2 Cleveland Division of Water


Help utilities obtain necessary funding
(i.e., rate increases) because elected
officials know that the most vulnerable
members of the community have
discounted rates and/or mitigated bills
Increase public acceptance of bills, rate
increases, and overall utility service.

The fact that there are disadvantages associated with affordability and assistance programs does
not necessarily mean that such programs should not be implemented and or supported. Instead,
it means that utility management should be mindful of the concerns and potential pitfalls so that
a program can be framed and operated in a manner that minimizes the risks, maximizes the
benefits, and is as efficient and effective as possible. Increasingly, municipal water utilities,
particularly those in larger cities, have determined that their circumstances justify moving
forward with these type of programs. The City of Cleveland has already made a similar decision,
and the objective now is to adjust and enhance its program so that the most economically
vulnerable segment of the customer base is able to receive the basic level of water service
required to meet human needs.

10.3 Affordability Standards


There is no official standard or threshold for determining when water or wastewater rates are
unaffordable. There is no commonly accepted definition of affordability. The topic of
affordability is too subjective for strict determinations, and the numerous factors that go into a
customer’s ability to reasonably afford these services mean that a single, clear criterion (or
criteria) is not possible to identify.

Nevertheless, there have been a number of attempts to set guidelines for utilities to use in
evaluating rates and bills with respect to their affordability. The U.S. Environmental Protection
Agency (EPA) has made several of these attempts, and even internally has come up with
different results. A 1995 EPA document indicated that for wastewater rates the ratio of annual
bills to median household income was less than 1 percent. If the ratio was more than 2 percent,
the rates and costs presented an “unreasonable burden” on the community. Between 1 percent
and 2 percent, EPA stated that various secondary criteria, such as unemployment rate and
property tax collection rate, should be examined in order to evaluate affordability and the
financial burden of the rates.1

A 1997 EPA report stated that wastewater system costs and rates were generally affordable if the
cost per residence was 2 percent or less of median household income.2 It is important to note
that this document also states that even though the rates may be affordable from a community-
wide perspective, they may still be unaffordable and a burden for some customers.



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


MFSG 10-3 Cleveland Division of Water


Then in 1998 EPA drafted affordability guidelines for small water systems, which stated that the
affordability threshold was 2.5 percent of median household income.3 This study was followed
up by another 1998 report that concluded, in part, that factors such as employment, income, and
cost of living influence the ability of ratepayers to afford their bills and that various tools were
available to assist with affordability, such as using the rate structure itself and alternative funding
sources.4

In 1999 the Small Business Advocacy Review Panel formed by the Small Business Association
concluded that the draft EPA guidelines for affordability were too high. This conclusion meant
that the Panel believed that unaffordable rates and charges would be at some level less than the
draft 2 percent of median household income.5 EPA was directed by Congress to review this
matter further. A subsequent panel created by EPA’s Science Advisory Board in 2002 to review
this issue agreed that the 2 percent standard was too high.6

A study published by the American Water Works Association took a different approach. It
stated that affordability could be measured by the level of uncollectable accounts. If that statistic
is more than 2 percent of all accounts, then the rates are not affordable, according to this study.7

The final examples of thresholds are from the State of Ohio. The Ohio Water Development
Authority offered community assistance to areas that experienced ratios of bills to median
household income of 1.1 percent for water and 1.5 percent for wastewater, or 2.6 percent for
combined bills.8 And the Ohio Public Works Commission established affordability thresholds of
either 2.3 percent or 3.0 percent of median household income for water and wastewater projects,
with the different standards depending on the level of the median household income.9

CWD’s data indicate that the typical customer’s annual water bills are in the range of 0.5% to
1.0% of annual household income. By virtually any of the thresholds that have been applied by
the agencies cited above, CWD’s rates would be judged affordable from a community-wide
perspective. The challenge of affordability lies in the subset of households that do not have the
average household income or who have other financial issues that make affordability a very real
concern. Affordability on a broad community basis should not mask lack of affordability at the
individual customer level.











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
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







MFSG 10-4 Cleveland Division of Water


These various reports and findings make it apparent that there is no consensus level of rates or
bills for water or wastewater services that is generally accepted to mark the divide between
affordability from un-affordability for a community. And as noted above, even where the
community can afford the rates, there is almost always a subset of the population who do not
have the means to afford water or wastewater service and may need assistance to acquire a basic
level of these services.

10.4 Existing Assistance Programs


CWD currently offers two major programs to assist customers in paying for water service. The
Homestead Program provides eligible customers with substantially discounted volumetric rates.
The 2010 Homestead rates are single tiered rates, unlike the normal service rates, which contain
two tiers. The Homestead rates are discounted 55.6% from the regular first tier and 79.2% for
the regular second tier. The Homestead rate does not provide for a discount on the fixed
quarterly service charge. Eligibility is based on customers who are more than 65 years of age or
who are permanently disabled, and whose annual income in 2010 is $29,500 or less.

The Cleveland Division of Water Pollution Control (WPC) also has a Homestead Program
discounted rate. The discount is currently 40.7 percent of the regular rate. There is no service
charge.

The second major program is the Affordability Program, which offers eligible low-income
customers a 20 percent discount on the bill. This discount applies to both the volumetric and
fixed service charge portions of the bill. Eligibility for this program is based on household
incomes that are lower than a published scale that varies by the number of people in the
household. This income scale is derived from the Home Energy Assistance Program (HEAP)
that is federally funded and administered by the Ohio Department of Development. The income
scale that is currently in place for the HEAP program ranges from $21,660 for one person to up
to $74,020 for a household of eight people, with additional allowances for larger households.

The Affordability Program does not apply to wastewater rates.

CWD also offers payment plans for customers who are delinquent in their bills and need some
time to catch up on arrearages. Many other water and wastewater utilities offer this opportunity.
Although this is not always thought of as an affordability assistance program component, it is a
very important one to customers. A ratepayer with a temporary financial crisis may find it
extraordinarily helpful to be able to pay off a past due amount over a specified period of time.
According to CWD, the time frame for these payment plans is usually not more than three
months, and there are no interest charges that accrue.

In addition to the assistance efforts that are made directly by CWD and WPC, the Cleveland
Housing Network (CHN) offers a number of assistance measures in support of water and
wastewater ratepayers. These measures include the following and proposed items:

MFSG 10-5 Cleveland Division of Water


• Installation of water conservation devices and education of residents regarding water
conservation. These activities directly assist with utility bill affordability because they
help households limit water use to more essential uses and avoid or mitigate bills for
wasteful or inefficient uses of water.
• Fixing water leaks and related minor plumbing problems that create waste and
unnecessary additional amounts on water and sewer bills.
• Repair and correction of frozen water lines so that water bills will not be inflated by lost
water.
• Repair or replacement of water service lines to qualifying residents.
• Proposed replacement of broken water and sewer mains so that low income households
are not obligated to paying the costs of line replacements, which tend to be too expensive
for low-income households to afford.

The CHN has proposed to continue providing these services would extend from July 2010 until
December 2011 or until the funds are expended. The estimated cost of these proposed services is
approximately $600,000.

These measures would provide a significant level of assistance to some households within the
CWD and WPC service areas. For many households, leaks, inefficient water uses, and related
expenses can make a huge difference between affordability and an inability to afford basic utility
service. The mix of services included in the proposal for the forthcoming 18 months is an
excellent approach to the “shrink the problem” component of a larger, comprehensive approach
to affordability. Of course, these services would not by themselves meet the affordability
requirements of all households or even necessarily most of them, but in combination they
comprise a very important component in the overall effort to address affordability of basic water
and wastewater service. Accordingly, we recommend that this set of services for low income
households be implemented on an ongoing basis in order to effectively deal with basic
affordability issues in the community.

10.5 Rate Structure


In addition to these two assistance programs, a major affordability benefit provided by CWD is
embedded in the rate structure itself. The first thousand cubic feet (MCF) is currently priced at
$12.58 for Cleveland customers and amounts ranging from $19.50 to $25.91 for direct service
suburban customers. The rates for all MCFs beyond the first MCF are $26.90 for Cleveland
customers and amounts ranging from $41.70 to $55.41 for direct service suburban customers.

The much lower rate for the first MCF is what is commonly known as a “lifeline” rate. A lifeline
rate is a rate that is much reduced compared to the rest of the rate tiers, usually at less than full
embedded average costs. In other words, it is typically a volumetric rate that is essentially a
subsidy from larger users to smaller users. In most communities that have a lifeline rate, the
justification for the below-cost initial tier is that the community places a high value on providing
critical utility services, such as water and wastewater services, at a price that the vast majority of
customers are able to pay for. No rate structure will be affordable to everyone unless the service
is free, so the objective is to set a rate that all but a very minimal set of customers can afford.
Courts in many (but not all) jurisdictions have ruled that this rate structure approach is legal

MFSG 10-6 Cleveland Division of Water


because it is within the discretion allowed to local communities. A lifeline rate differs from a
strong conservation or inefficiency “penalty” rate in that under these structures the initial tier is
priced at full cost and the subsequent tiers are above-cost rates. The distinction between these
structures and a lifeline rate structure is subtle and often is the result of a cost of service analysis
that establishes the structure to achieve the desired objectives.

The WPC does not have a tiered rate structure, so this lifeline rate concept is not currently being
used for wastewater service.

For the purposes of this analysis, the current water rate structure, which offers this financial
benefit to the lower volume users, is considered to be implicitly part of CWD’s overall
affordability assistance package available to customers because it enables many of them to afford
water service that they might not be able to afford at the second tier rates.

10.6 Benefits Provided


Based on 2008 data provided by CWD, there were about 20,900 households participating in the
Homestead Program and approximately 2,100 households participating in the Affordability
Program. All water customers benefit from the discounted first rate tier of the CWD rate
structure.

Based on 2008 data, the Homestead Program results in almost $2.3 million in foregone revenue
compared to the revenue that would have been received if the regular rates had been charged to
these customers and if these customers had been able to pay the full cost rates. The latter
assumption is particularly questionable, given that they already have been determined to be low
income households. It is not possible to know how many of these customers would have had the
ability to pay full cost rates or how many would have paid the rates but would have needed to
forego other essential goods or services. All that can be said is that some percentage of them
would have been unable to afford water service without the Homestead Program.

The foregone revenues of the Affordability Program are estimated to be about $82,000 using the
same 2008 data. The low revenue number reflects the low participation rate of this program.

The largest “assistance” program component is the discounted first MCF, i.e., the “lifeline” rate.
Because all customers benefit from this discounted rate, the foregone revenues in 2008 totaled
approximately $21.7 million. Clearly, this feature that is intended to provide a basic quantity of
water at a more affordable price has a large implicit cost. Because all customers are subject to
the same initial rate tier, it benefits those who require financial assistance and many others who
do not require assistance.

Based on these numbers, CWD is theoretically foregoing more than $24 million annually to
assist the segment of its customer base that may not otherwise be able to pay for service. In
addition the Homestead Program provides discounted rates for WPC wastewater customers that
add another $360,000 to the total foregone revenues. Therefore the total foregone revenues for
the water and wastewater utilities together may be as much as $24.4 million annually under the
current programs and rate structure. However, this estimate is an upper end estimate because it

MFSG 10-7 Cleveland Division of Water


implicitly assumes that CWD could and would charge the higher rate for water use up to one
MCF as well as for the use in excess of one MCF and that customer demands would be
unchanged. This may not be true because a) customer demands might indeed change in response
to price changes and b) CWD might not need to charge the full, higher rate for all use because
the revenue needs might be met at some intermediate rate level. Therefore, the true cost of the
assistance being provided is likely a somewhat smaller number, but still very probably
somewhere in the range of $8 million to $16 million, in our opinion.

10.7 Effectiveness of the Current Assistance Programs


The following section of the report discusses the effectiveness of the current assistance programs
offered by CWD.

10.7.1 Participation Rate

The most common method of determining the effectiveness of a water and wastewater
affordability assistance program is to compare the number of households participating in the
program with an estimate of the number of households who are either unable to pay for these
services or who may pay for these services, but who are then unable to afford other essentials,
such as food, housing, basic medical care, and so on. The number of participants is relatively
easy to determine. The number of those in need is very difficult to estimate with any accuracy,
because a utility does not have access to income data for all its customers. All that can be done
to estimate the number of households who are in need of assistance is to examine the most
readily available US Census data, adjust for current economic conditions, and use some
reasonable assumptions.

The current Homestead Program is moderately effective in assisting low income households.
The participation of nearly 21,000 households appears to be a very good participation rate of the
potentially eligible households. The number of potentially eligible households is not known, but
a very rough estimate of the number can be made. Using 2000 Census data on the number of
owner-occupied single family dwelling units and assuming that there are perhaps 5 percent to 25
percent of owner occupied single family households at the various income levels less than
$28,000 and at an age level that would meet the Homestead requirement, a reasonable estimate
of potentially eligible households can be made. This assumption regarding the number of
households with incomes less than $28,000 owning single family homes initially may seem high,
given that incomes at this level or less would have a low rate of home ownership because of
income constraints, i.e., qualifying for a mortgage, ability to make mortgage and utility payments
and still meet other financial obligations, etc. The majority of low income households are
renters, usually in multi-family dwelling units. However, the mean household retirement income
plus the mean social security income reported in the Census totaled about $28,000 for the
Cleveland PMSA, which means that there would be retiree households who meet the income
standard for the Homestead Program and still own a home by virtue of having purchased the
home during their working years.

Using the household owner occupied dwelling assumptions, approximately 33,000 to as many as
50,000 households in the CWD service area could potentially qualify for the Homestead

MFSG 10-8 Cleveland Division of Water


Program. If this estimated range is reasonable, the CWD Homestead Program is certainly very
successful in terms of participation. Typically a reasonably good participation rate for an
income-based assistance program is about 25 percent. It is estimated that the CWD Homestead
Program participation is somewhere in the 30 to 50 percent range. Despite reliance on such
assumptions and professional judgment, it is reasonable to conclude, in our opinion, that this
program is doing relatively well in reaching its target subgroup of ratepayers.

The Affordability Program does not exhibit the same success level in terms of reaching and
assisting low income customers. About 2,100 households participate in this program. There is
little information to assess why this participation rate is so low. One possibility is that the
discount is insufficient to attract applicants. Another possibility is that customers are not aware
of this relatively new program, which began in 2007. Additionally, to qualify for the discount
programs, the customer must be the owner of the property which as a result disqualifies renters
from participation. Regardless of the reason, it is apparent that this program requires some
modification in order to achieve the results that were intended and that could be anticipated from
a discount program for water service in a large metropolitan area.

10.7.2 Other Measures

There are other measures that are used to assess the effectiveness of utility affordability
assistance programs. One is the number of shut-offs for non-payment. If an assistance program
is highly effective, the number of shut-offs for bill delinquencies should be minimal. As noted
above, this type of measure is somewhat imperfect because it does not measure how many
customers are paying their bills to receive essential water service, but are thereby forced to do
without adequate food, necessary medical attention, sufficient heat in the winter, and other
essentials.

Another effectiveness measure is the allowance for bad debts or the write-offs of bad debts.
Although this type of measure is sometimes suggestive of affordability issues, it does not filter
out affordability reasons for bad debts from other reasons. As a result, this measure is perhaps
helpful in assessing the success of an affordability program in conjunction with other
effectiveness measures, but it is unreliable as a standalone measure.

10.8 Barriers to Assistance Programs


There are numerous reasons why municipal utility assistance programs that are income-based do
not achieve a high percentage of participation by eligible households. Some of the most
common ones are the following:

• Lack of awareness of the assistance program


• Lack of information or understanding about how to apply
• Mistrust of government
• Pride and the perception of assistance as being degrading
• Unwillingness to provide personal or household income data
• Government bureaucracy and general difficulty of application (e.g., understanding what
to do, time required to apply being viewed as being excessive, etc.)

MFSG 10-9 Cleveland Division of Water


• Language or communication barriers
• Transportation barriers (to get to intake locations to apply)

These and other barriers are frequently cited in surveys of low income utility customers as
reasons why they are not participating in the program or as obstacles that participants considered
before applying. In reviewing how efficiently an income-based assistance program is being
implemented and how effective it is, utility management should consider these obstacles and
evaluate options for minimizing them. Doing so often significantly enhances how well such a
program is working.

10.10 Affordability Program Features and Options


There are a relatively wide variety of affordability program features and options from which a
utility may select in its efforts to assist those who have difficulty paying water or wastewater
bills. The various possibilities are displayed in Table 10.2.

Table 10.2 - Affordability Program Options


Item Description and Notes
Rate Structure Elements
• Inverted block rates The low first block benefits small users,
particularly the lower income small users.
Beneficiaries may not require assistance.

• Lifeline rate Initial block of water use priced at less than full
cost or is free. Subsequent rate tier(s) are at
higher rates. Beneficiaries may not require
assistance, unless the lifeline rate eligibility is
based on income criteria.
• No fixed service charge
The fixed charge is a disproportionate financial
burden on smaller users. The low income
population typically has slightly lower average
use than customers with higher incomes.
However, there are many low income users who
continue to use relatively high volumes.
Discounts
• Discount the entire bill by a given Discount the entire bill for those with qualifying
percentage for those eligible low incomes. Percentage discount is
predetermined. Has a negative conservation
price signal.
• Discount only the fixed service
charge for those eligible The discount is in effect a fixed dollar amount.
Benefits the smaller users, but may hurt the low
income customers with larger consumption
• Discount only the volumetric levels
charge for those eligible

MFSG 10-10 Cleveland Division of Water


Discount the entire bill for those with qualifying
low incomes. Percentage discount is
• Discount the entire bill by a given predetermined. Has a negative conservation
percentage up to a maximum price signal.
consumption level
Limits the negative conservation price signal,
• Discount the bill based on a sliding but may not be effective at assisting the low
scale of household income levels income customer who have larger usage volumes
as a result of large household sizes, inefficient or
• Discount the bill by a fixed dollar leaky fixtures, or other reasons.
amount that may or may not be
graduated by income Predetermined bill discount for each income
level. May be difficult to implement.
• Discounts based on non-income
criteria This fixed discount is predetermined and offered
to eligible customers.

Bill discounts or discount percentages are


established and offered to eligible customers.
Eligibility is based totally or in part on non-
income criteria, such as extraordinary medical
expenses, changes in household status that
impact ability to pay, etc. May require
considerable effort to establish eligibility criteria
and effort to monitor such circumstances.
One-Time Assistance
• Crisis vouchers One-time vouchers or credits that a customer
may use to lower their bill on an annual or other
non-recurring frequency. Recognizes that
customers may experience one-time ability to
pay their utility bills.
• Fixture repairs
In-home repairs or replacements of fixtures that
are leaking and adding to affordability problems
of customers. Performed with customer consent
and paid by the utility. CWD is doing this in
partnership with Cleveland Housing Network.
• Bill write-offs
Bill write-offs and forgiveness if circumstances
• Delinquency charge write-offs meet established criteria.

Write-off delinquency and late payment charges,


• Leak adjustments which only compound the inability to pay.

MFSG 10-11 Cleveland Division of Water


Adjust bills down for leaks that customers report
and are verified. Usually these adjustments are
• Assistance not based on income made in conjunction with repairs of the claimed
eligibility, but rather based on other leaks.
non-recurring events, such as
extraordinary medical costs Provide credits, discounts, forgiveness, and other
program elements based on non-income criteria,
such as extraordinary medical expenses, changes
in household status that impact ability to pay,
etc. May require considerable effort to establish
eligibility criteria and effort to monitor such
circumstances.
Customer Service
• Monthly billing if not already doing If billings are less frequent than monthly,
so implement monthly billing for some or all
customers. Does not reduce the bill by itself, but
frequently does enable customers to better
manage their limited finances and better
anticipate the utility bills.
• Budget billing Bill customers for 11 months based on an
estimate of annual water use, and then bill the
final bill of the year based on the actual metered
usage. Provides the same benefits to the
customer as monthly billing, and also provides
the utility an opportunity to save costs by only
• Payment plans (usually without reading a meter once a year.
interest charges)
Provides customers with the opportunity catch
up on past due accounts without fear of service
shut offs. May add to the overall financial stress
of a customer by requiring payments on the past
due amounts in addition to keeping current on
the ongoing usage billings.

10.11 Recommendations for Enhancements


The following section of the report provides recommendations for enhancing CWD’s current
affordability program. The recommendations include items for immediate action in and those
that CWD should consider over the long-term.

MFSG 10-12 Cleveland Division of Water


10.11.1 Short Term

There are suggested several adjustments and enhancements for CWD’s current affordability
assistance package components. The recommendations include the following items, which could
each be implemented within a relatively short period of time.

1. CWD should establish clear goals for its affordability assistance programs. CWD
resources would be well spent in determining what it seeks to achieve overall from
programs and rate structure features aimed at addressing affordability concerns.
Performance measures and desired outcomes should be clearly delineated and approved
by CWD management. Currently there does not seem to be an established set of goals,
and consequently, the existing affordability features do not appear to be coordinated as an
integrated package for maximum effectiveness. The absence of targets for participation
and average bill reductions for eligible households makes it difficult at best for upper
management to determine how well these programs are doing and if they are
“successful.” The implementation and processing performed by the Cleveland Housing
Network for the Discount Program adds further distance between CWD and the intended
recipients. Having an agency such as the Cleveland Housing Network administer the
eligibility-related programs is a good approach as long as CWD makes sure that its
procedures are being followed, its customers are being well served, and its goals are
being met. But without a set of goals, the latter becomes difficult at best.

2. It is recommended that the discount for the first tier of 1 MCF be revised to a
consumption level of no more than 0.6 MCF. The current discount is applicable to too
large a usage amount to reasonably be described as the consumption level necessary for
basic human needs and health. Data from 2008 indicate that more than 23 percent of the
customers have usage that does not exceed 1 MCF and more than 39 percent of the
consumption is within the first MCF. These statistics strongly suggest that the discounted
rate is being applied to more than truly essential levels of water use, and instead are often
extending into less essential consumptive uses. Making this change would save CWD
approximately $8 million to possibly $10 million annually in foregone revenues, which
could be used either for overall rate relief, redirected to enhancing the low income
assistance program, meeting other utility spending needs, or a combination thereof.

Because the discount for the first MCF is not means tested, i.e., has no income eligibility
requirement, the effect of a large consumption tier with a significant rate discount is that
every customer receives some financial benefit from the discount, many of whom are
fully financially self sufficient and do not require financial assistance to afford their bills.
In addition, non-residential customers benefit from this rate structure as well, which
further diminishes the rationale of a lifeline rate from its purpose of assisting the
affordability of residential water service. Also, the discount provides a fairly sizable
negative conservation price signal by suggesting that a substantial portion of the typical
water usage costs less than it really does. Although CWD has had declining water
demands and may not have a strong need for conservation to meet current demands, it is
still important that low income households value conservation of water in order to
“shrink the problem” of bills that they are unable to afford. If all or most of the water

MFSG 10-13 Cleveland Division of Water


consumption is within the first tier, the customer does not perceive that this rate is
anything other than the “normal” rate and may be unaware of a significant bill increment
if consumption extends into the second rate tier. A smaller sized lifeline rate tier will
help send a better signal in this regard.

3. It is recommended that the Affordability Program discount be increased from the current
20 percent level to 40 percent. The increase in the discount percentage will help attract
applications and increase participation. Although 20 percent is helpful to low income
residential customers, it is insufficient to be effective at both encouraging participation
and providing enough assistance to make much difference in overall affordability. A
common question in dealing with affordability issues for municipal water and wastewater
service is “How much is enough?” There is no single answer to this question, but
consider the following. A normal low income household could receive a benefit from
this program of $4 to $10 per quarter, which is only $1.33 to $3.33 per month. Although
helpful, this level of benefit usually is going to be insufficient to materially assist with
affordability or be a strong incentive for a customer to apply for the program’s benefits.
A larger discount percentage will enhance the outcomes in both regards.

4. The Homestead Program has been the more successful of the two assistance programs in
terms of participation and benefits accruing to low income households. The discounted
rates are well below the normal rate levels. It is suggested the CWD consider two
modifications to this program that would enhance its benefits to eligible households.
First, it is recommended that the quarterly service charge be discounted from the normal
level for eligible households. This would provide an easy-to-implement benefit
enhancement and would make the Homestead Program more consistent with the
Affordability Program that applies to both the volumetric and fixed service charge
components of the bill. Discounting the quarterly service charge would add to the
assistance level this program provides.

Second, it is recommended that the Homestead volumetric rate have a second tier, as does
the normal customer rate structure. Because there is currently a single tier, the discount
from more usage is higher than for smaller consumption amounts. In effect, it
encourages a low income household to use more water, which adds to the burden of the
water bill instead of reducing it. The objective should be to “shrink the problem”, not to
increase the problem. The Homestead Program’s discount from each of the normal rate
tiers could be the same percentage or different percentages, but currently the implicit
discount from the second rate tier (i.e., more than 1 MCF) is more than 79 percent, which
is too high to encourage efficiency of water use and much limiting of the water bill size,
in our opinion. In short, there needs to be a better balance between the assistance
discount and an incentive to limit water use to “shrink” the overall bill.

5. CWD should develop a marketing plan to promote its Homestead and Affordability
Programs. There was some initial marketing in the form of a one-time bill stuffer, and
there is an ongoing page on the web site mentioning these programs. It is recommended
that a regular, recurring set of marketing efforts be undertaken if CWD desires to reach

MFSG 10-14 Cleveland Division of Water


out to as many as possible of the customers experiencing significant affordability
problems. Specific recommendations include:

• An annual bill stuffer that is either exclusively devoted to assistance programs or at


least devotes a substantial portion of the stuffer to this topic.
• Occasional major media announcements, which can be expensive, but are very
effective and could be funded by savings from reducing the lifeline rate tier from 1
MCF to a lesser quantity.
• Enhanced web site to provide more information on how to apply, where to apply,
and other useful details.
• Develop an affordability assistance brochure that can be distributed at pertinent
public events, available at CWD and Cleveland government offices, etc.
• Consider coordinating with schools and churches in low income neighborhoods or
low income zip codes to distribute information regarding available affordability
assistance.

By using these and other marketing techniques, CWD will increase the likelihood that it
will reach more of its intended set of customers who are in legitimate need of assistance.

6. We recommend that CWD consider offering longer term payment plans without interest
charges for customers who may be unable to pay their bills. The potential downsides of
this suggestion are that CWD may perhaps lose some interest income compared to more
immediate payments, have a slower cash in-flow, and might perhaps create an incentive
for customers to opt for this approach in an attempt to defer or eventually evade
payments. However, we believe that these potential disadvantages may be more illusory
than real and that other advantages would offset whatever disadvantages that might
occur.

The current payment plans of three months offer relatively minor benefit to customers
who may be experiencing a temporary or relatively short term financial difficulty.
Affordability will be improved for such households if they have a period of perhaps 6
months to a year or more to catch up on delinquent balances and deal with a more level
payment obligation. Other utilities have found that longer term payment plans help the
utility eventually collect most of all of what is due, and it is certainly true that collecting
even partial payments on delinquent balances is preferable to collecting nothing when the
customer’s service has been shut off and the customer has declared bankruptcy, become
an uncollectible account, or even abandoned the service. It is possible that by eventually
collecting more than it might have under a shorter payment plan that CWD might actually
collect more past due payments, not less, and earn more interest income, not less. If
nothing else, we would recommend that a longer payment plan element of the
affordability package be tried on a pilot basis to compare to the current payment plan
approach and to make an informed determination based on the payment characteristics of
its customers, rather than the experience of other water systems.

7. Budget billing is another feature that can be added to CWD’s approach to affordability.
Rather than billing customers based on the current meter readings each quarter,

MFSG 10-15 Cleveland Division of Water


customers should be given the option to be billed monthly based on the estimated annual
water usage and the current rates. This monthly bill would be sent to the customer for 11
consecutive months, and then the 12th month would be a true-up bill based on the actual
metered usage for the year, minus the bills for the first 11 months. The benefit of this
option can be substantial for low income households. Monthly bills are easier for
virtually all customers to plan for and pay, even if the amounts are equivalent annually to
four quarterly bills. Although budget billing does not alter the total costs a customer is
responsible for paying, it does improve their ability to make payments. The CWD billing
system would need to be able to provide this billing option for this to be an
implementable recommendation.

8. CWD should also consider offering crisis vouchers to customers who have a temporary
or one-time financial problem with bill payment. Eligibility might be coupled with the
eligibility verification of the Homestead or Affordability Programs, but need not be the
same as the eligibility criteria for those programs. Criteria should be established for
eligibility, and when met, the customer could be provided with a one-time credit against a
portion of the bill. This credit could be a once-in-a-lifetime benefit or perhaps a once-a-
year benefit. If CWD considers implementing this form of assistance, we do not
recommend that a crisis voucher be provided more often than once a year. The concept is
that this would be an affordability aid in a time of true crisis (hence the name “crisis
voucher”), and not an annual giveaway or entitlement. Such a voucher system could help
some customers bridge a temporary crisis situation until the crisis had passed and the
customer could resume normal payments. Should CWD implement a vouchers program,
we recommend that a third party be used to verify need. An entity such as the Salvation
Army may be willing to assist in managing the program.

10.11.2 Longer Term

A. Renters/Multi-Family Tenants

Probably the most difficult affordability assistance issue faced by CWD is that of
addressing the impacts of rising water bills on multifamily customers. CWD is not
unique in identifying or wanting to address this situation. Virtually all major water and
wastewater systems that have implemented or considered implementing an affordability
assistance program have at some point expressed some frustration in how to deal with
these citizens. The issue is very difficult to address, and there are no easy answers.

On average, most low income households are renters, rather than property owners.
Simply put, low income households are generally less able to afford acquiring property,
so they tend to rent apartments and other housing units. Of course there are exceptions.
An example of an exception is a household of retirees who may have relatively annual
low income, but have sufficient accumulation of savings and other financial resources to
draw upon so that they may both own their homes and also afford the utility bills.
Another example may be a low income household that has inherited a home. But these
types of exceptions are not the norm. It is fair to say that most low income households

MFSG 10-16 Cleveland Division of Water


are not property owners and therefore do not have access to CWD’s two assistance
programs.

Why do renters matter? The answer is that rising utility bills are eventually passed along
from landlords to tenants in the form of increased rents. Consequently, a municipal water
or wastewater utility may indirectly create financial hardships for a segment of the
community because of rate increases. Elected officials often have concerns about how
their utilities may be causing citizens to go without adequate food, perhaps lose their
ability to afford housing, may be neglecting their needs for medical care, and so on. As
infrastructure in the nation’s cities ages and requires costly investments for maintenance
and replacements, this phenomenon of impacts on renters becomes more common.

A utility’s ability to deal with the issue of affordability for renters is severely restricted.
First of all, the renters are not customers of the utility. Therefore, the utility has no direct
business relationship with them. Secondly, the utility does not know who these low
income renters are. This makes it inherently difficult to provide them any assistance.
The utility would need to rely on these citizens to identify themselves through some sort
of application process. The major barriers to doing that effectively have been previously
listed. Thirdly, there may be legal or financial constraints that limit or prohibit providing
these tenants with financial assistance. For example, some local laws, bond covenants, or
even provisions required of grant recipients may restrict how utilities might try to provide
assistance. Finally, any financial assistance that is provided to the landlord may not be
passed along to the tenants. There is considerable risk that utility bill assistance would
merely result in lower net bills to the landlord or property owner and no rent reductions
being passed along to low income tenants.

There are a small number of options that CWD might consider to deal with this problem.
None of them is ideal, but if there is sufficient importance placed on dealing with this
issue and the willingness to invest significant financial resources, there are possibilities.
Any of them would require a relatively long term effort; none is a short term solution.

One approach that has been tried is to establish a program in which low income tenants
apply for assistance, much like under the current Affordability Program or Homestead
Program. If they qualify, the utility sends them a monthly voucher for a specified
monthly dollar amount. The tenants would then provide the voucher to the landlord on a
monthly basis as partial payment of the monthly rent. This is the benefit to tenants that
partially offsets the implicit portion of the rent that is the water bill. The landlord then
redeems the voucher, along with the vouchers of all other qualifying tenants, by
submitting it to the utility as partial payment of the water bill. In this indirect manner
tenants receive some rent relief, and although the landlord receives less monthly rent, the
reduction is exactly offset by credits to the water bill.

This approach has been tried on a pilot project basis in Portland, Oregon, but we are
unaware of any major utility that has successfully implemented it on a wide scale level.
The major barrier to this option is that landlords must be willing to accept the vouchers in
exchange for reduced water bills. The administrative costs to landlords of keeping track

MFSG 10-17 Cleveland Division of Water


of this and to the utility of implementing it are likely fairly high. Furthermore, there is
the difficulty of explaining the process to the potential tenant recipients, enforcement
against counterfeiting the vouchers, the costs of income verification and updating, and
other administrative barriers.

A second approach is to retrofit multifamily dwellings with individual meters on each


dwelling unit. This approach typically is not prohibitively expensive for new
construction, in fact it is becoming more and more common, but it does indeed add some
costs to the housing development. With individual meters, each multifamily dwelling
unit becomes a direct customer of the utility and potentially can be provided bill
assistance (assuming that the eligibility requirements were modified and no longer
limited to property owners) with considerably less effort and cost. For existing
multifamily housing, a retrofit can be very expensive. There is virtually no incentive for
the landlords to invest in such a plumbing retrofit, so the utility would have to invest in
this modification. There are two major obstacles. One is the cost. It would be very
costly in most structures, perhaps prohibitively so in some cases. Second, the utility
would need to receive permission from the landlord to do this work. The permission may
be difficult to obtain, given that it involves extensive construction work that adversely
impacts the appearance and livability of the premises for some period of time.
Nevertheless, it remains an option to pursue, but is likely to only be successful on a case
by case basis.

A third option is to tie the financial assistance to another utility service, usually electric
service. If a water utility can arrange with the electric utility to combine their efforts to
assist low income customers, then the water utility can funnel assistance to mitigate water
bill increases through credits on the electric bill. This approach works best when the
municipality provides both water and electricity services because inter-utility differences
and goals can be more easily resolved. But even where they are not both publicly
provided, it is possible to achieve mutual cooperation to provide multi-family assistance.
The major obstacles to this approach are a) to agree on the cost and other terms of this
additional work by the electricity provider, b) to agree on how billing and eligibility
disputes and related customer issues will be resolved, and c) to agree on how partial
payments, service shut-offs, and other processes will work.

None of the available approaches are very attractive. They each have significant issues
and challenges to overcome before they can be successfully implemented, which is why
many municipal water providers have struggled with how to provide assistance to renters,
particularly in multi-family complexes. If CWD is interested in pursuing one of these
approaches to renter assistance, it is strongly recommended that expert assistance be
contracted to consider the details of the preferred approach. This expertise could include
many skill sets, including but not limited to legal, financial, billing and customer service,
business processes, and others. The experience of other systems seeking to deal with the
same issue has been that the details are the key to the eventual outcome and success level.

MFSG 10-18 Cleveland Division of Water


B. Homestead Program

The Homestead Program provides assistance to low income households that are elderly or
disabled. It is recommended that CWD examine the possibility of eventually opening up
this program that appears to be successful and popular with many CWD customers to all
low income households. By enabling all low income households to participate, the
Affordability Program could be ended or modified significantly, and the overall
assistance effort could be focused on this program. It might provide opportunities for
greater efficiency and effectiveness. It is worth studying this idea more thoroughly at
some point.

C. More Frequent Billing

From an affordability perspective, CWD should evaluate the potential for moving from
quarterly billing to monthly billing. Monthly billing has been found to nearly always
promote affordability. Customers are better able to plan for and pay smaller, more
frequent bills than larger, less frequent bills. Of course, more frequent billing would add
to overall costs because of the costs of more frequent meter reading, more bills (that
inherently involve more envelopes, printing, and postage), and perhaps more customer
calls and/or a one-time billing system reprogramming cost. Therefore, we suggest that
CWD undertake an analysis of the costs and evaluate from a policy perspective whether
the additional costs are justified in terms of affordability and customer satisfaction. A
decision to change the billing frequency is a major decision by any water utility, and
therefore it should be made based on a thorough analysis and discussion, including input
from a wide spectrum of the customer base. Most water utilities have moved to monthly
billing because they have determined that there are advantages such as:

• Improved affordability for customers


• More immediate price signal to customers that enhances conservation and/or efficient
water use
• Greater customer satisfaction.

Although monthly billing is not necessarily the best option for every water system, it has
enough potential to be of value to CWD that we recommend a more comprehensive
analysis of this option be undertaken if one has not already been performed.

10.12 Additional Information


There are many literature sources that CWD might want to consult regarding the topic of
affordability. Some of the most helpful and most commonly cited sources are the following:

• American Water Works Association. Manual M1 Principles of Water Rates, Fees, and
Charges --- AWWA Manual of Water Supply Practices M1. Fifth Edition 2000.
• American Water Works Association. Thinking Outside the Bill: A Utility Manager’s
Guide to Assisting Low-Income Water Customers. November 2004.

MFSG 10-19 Cleveland Division of Water


• Hasson, David. “Water Utility Options for Low-Income Assistance Programs”. Journal
AWWA. April 2002.
• Water Environment Federation (Hasson, et al). Affordability of Wastewater Service.
2007.
• Water Research Foundation & Environmental Protections Agency. Best Practices in
Customer Payment Assistance Programs. 2010.

10.13 Conclusions
In summary, CWD has made a commitment to assisting with the affordability of water service to
the most vulnerable portion of its customer base. The Homestead and Affordability Programs,
along with a heavily discounted initial rate tier demonstrate this commitment and are important
elements to a successful affordability initiative. This report provides information on other
options that have been implemented elsewhere, with varying degrees of success.

This report has recommended some short term improvements to CWD’s approach, as well as
some longer term areas for future analysis and potential enhancements. Because the
circumstances of a utility’s service area differ from virtually every other utilities’ circumstances,
there is no single set of program features that will be effective and efficient in all cases.
Differences in socio-economic conditions among service areas, costs of providing service,
community values, and many other factors all contribute to a situation in which what works well
in one location may not be as effective elsewhere. Therefore, CWD, like any other utility,
should carefully consider the available options in light of the local circumstances, needs, and
priorities. This report has attempted to offer suggestions that have a relatively high likelihood
for improving affordability in the CWD service area. CWD has already established a basic
foundation for addressing this issue, and with some initiatives to enhance the existing programs
and test a couple of alternative approaches, CWD may well find that the level of concerns
regarding affordability drops considerably. This is a key goal for any water utility affordability
program. There will be clear challenges along the way, particularly the matter of multi-family
residents (typically renters), but there will also be some relatively easy successes as well.

MFSG 10-20 Cleveland Division of Water


11.0 CONCLUSION

This chapter of the report provides a comprehensive summation of the project team’s findings
and recommendations for implementation of the Comprehensive Financial Plan by CWD
management.

11.1 Findings
The following section presents a summary of the key findings developed during the completion
of the Comprehensive Financial Plan.

• The cost of operating the CWD system (the revenue requirements) is projected to
continue to increase over the study period. The projected increases in revenue
requirements are a result of increases in all categories of expenses and as the result of the
issuance of new debt. CWD continues to pursue opportunities for cost savings through
operating efficiency. The average annual increase in revenue requirements is 3.3%. The
cumulative increase in revenue requirements over the study period is approximately
16.5%.

• These efficiencies are reflected in the revenue requirements. However, even with cost
containment, the facts are that a significant portion of the cost of operating and
maintaining the system are outside the control of CWD and that approximately 80% of
the costs of operating the system are fixed. The annual revenue requirements will total
approximately $1.32 billion over the study period.

• We project that CWD will continue to experience declining water sales over the study
period. A number of factors are contributing to the declines in consumption. The
primary factors impacting residential consumption are the continued reduction in the
household size, the ongoing replacement of water fixtures and appliances with low flow
fixtures and appliances, increases in water and sewer bills and general economic factors.
The factors leading to declining commercial consumption continue to be more efficient
use of water through recycling, changes in the type of commercial activity in the region
(shift from manufacturing to service based industries) and the impact of the overall
economic conditions. The projected continued decline in water consumption over the
study period will need to be addressed in the financial plan as the billable quantities of
water, which serve as the majority of the basis for CWD revenues, will produce reduced
revenues.

• Based on the projected revenue requirements and given the continued decline in water
sales over the study period, the CWD’s cost of providing water service to its customers
over the next five years will exceed revenues generated by existing rates and fees.
Expenditures will outpace revenues by about 32% cumulatively over the study period.
The results of the shortfalls in revenues will greatly jeopardize the financial viability of
CWD. Existing cash balances will be exhausted and the Rate Covenants on existing debt
will not be met, resulting in default. As a result, CWD is faced with either significantly

MFSG 11-1 Cleveland Division of Water


cutting operating and capital expenditures and not continuing capital improvements or
increasing water rates and fees. However, since the majority (approximately 80%) of
CWD’s operating and maintenance costs are fixed and the capital projects included in the
capital improvements program are necessary to ensure that the system remains operable,
in reality CWD must increase rates and fees while continually looking for opportunities
for efficiencies in operation to reduce expenditures.

• Our analysis of ancillary fees and private fire protection charges reveals that the current
level of the fees and charges will not support the cost of providing these services due to
the increasing cost of providing these services over the period. The calculated fees and
charges are presented in Section 7 of this report.

• Based on our cost of service analysis it was determined that the current service district
rate differentials do not reflect the cost of service. The analysis reveals that the primary
reason for the changes in differentials is due to declining demand in the City and
necessary capital investments in buried infrastructure required in spite of demand levels.

• Our analysis of the cost of service for master meter communities reveals that master
meter rates should be approximately 70% of the direct service rates for the rate district
serving the community.

• Based on our review of the current water rate structure, two key conclusions can be made
regarding the current rate structure.

o The fixed portion of revenues generated by the current rate structure as a percentage
of total revenues is extremely low at approximately 4%. As a result, CWD revenues
are highly dependent on water consumption which continues to decline and are
subject to a high level of volatility.

o The current consumption portion of the water rate structure does not provide an
appropriate level of rate equity among users of the system. Specifically, the current
structure:

 Provides a “lifeline” quantity of water that represents half of the average


customers usage, which far exceeds a true lifeline quantity;

 Does not match the cost of service differentials;

 Includes an inclining block structure with a significant differential


between the 1st MCF and additional MCF’s that causes volatility in
revenues with changing water demand and discourages water
consumption; and

 Includes consumption rates for the 1st MCF and Homestead that are set at
levels well below the cost of providing water.

MFSG 11-2 Cleveland Division of Water


• Based on our review of the current structure, CWD has an opportunity to modify the
current structure to more appropriately match its objectives and address changes in the
system.

• The two assistance programs offered by CWD have different levels of effectiveness as
measured by participation. The Homestead program appears to be rather effective as it
has a participation of approximately 21,000 households, which is estimated to be a
participation rate of between 30% and 50% of eligible households. The Affordability
Program does not experience the same level of participation as only about 2,100
household participate. There is little information to assess why this participation rate is
so low. One possibility is that the discount is insufficient to attract applicants. Another
possibility is that customers are not aware of this relatively new program, which began in
2007. Additionally, to qualify for the discount programs, the customer must be the owner
of the property, which as a result disqualifies renters from participation. Regardless of
the reason, it is apparent that this program requires some modification in order to achieve
the results that were intended and that could be anticipated from a discount program for
water service in a large metropolitan area.

11.2 Recommendations

The following section presents a summary of the major recommendations developed during the
development of the Comprehensive Financial Plan.

• We recommend that CWD increase water rates and fees over the next five years to fund
the ongoing operations of the system as indicated in Section 9, Alternative 4, of this
report. The increases are necessary to ensure the ongoing operation of the system and
specifically to meet coverage requirements on debt service obligations and to maintain
cash reserves.

• We recommend that CWD implement increases to ancillary fees and charges as presented
in Section 7 of this report.

• We recommend that CWD adopt an alternative rate structure that will phase-in the
following modifications over the study period.

o Increase the fixed customer service charge and call it the “base fixed cost
recovery charge.”
o Impose the fixed charge based on meter size.
o Reduce the “lifeline” quantity of water (1st unit of water).
o Reduce the rate differential between the “lifeline” quantity of water (1st block)
and additional MCFs.
o Reduce the percentage of the Homestead discount.
o Implement the cost of service differential for direct service suburbs as shown in
Section 8 of this report.
o Implement the cost of service differential for master meter communities also as
shown in Section 8.

MFSG 11-3 Cleveland Division of Water


• Table 11.1 below presents the modifications to the water rate structure as described
above. It should be noted that due to the increase in the fixed charge the consumption
rates will remain unchanged in 2011.

Table 11.1 - Recommended Rates – Quarterly Billing (2011 – 2015)


Rate District 2011 2012 2013 2014 2015
All Customers Meter Size
Base Fixed Cost
5/8”, 3/4”, 1” $18.00 $18.00 $21.00 $24.00 $27.00
Recovery Charge*
1 ½”, 2” $36.00 $36.00 $41.00 $47.00 $53.00
3”, 4” $120.00 $120.00 $140.00 $160.00 $180.00
6” $220.00 $220.00 $250.00 $290.00 $320.00
8” $330.00 $330.00 $380.00 $430.00 $480.00
10” $410.00 $410.00 $480.00 $540.00 $610.00
12” $500.00 $500.00 $570.00 $650.00 $730.00
*Fixed charge for compound meter based on larger size
Cleveland Rates shown in $ per MCF
(1)
Regular 0 - 0.6 MCF $12.58 $13.76 $15.51 $17.34 $19.26
Additional MCFs $26.90 $27.52 $29.48 $31.22 $32.74
Homestead All MCF's $5.59 $6.88 $8.53 $10.41 $12.52

Direct Service Suburbs


Low / 1st High
Regular 0 - 0.6 MCF(1) $19.50 $20.47 $22.11 $23.63 $25.04
Additional MCFs $41.70 $41.70 $42.01 $42.53 $42.56
Homestead All MCF's $8.67 $10.23 $12.16 $14.18 $16.27

2nd High
Regular 0 - 0.6 MCF(1) $22.64 $24.08 $26.38 $28.62 $30.82
Additional MCFs $48.42 $48.42 $50.11 $51.51 $52.39
Homestead All MCF's $10.06 $12.04 $14.51 $17.17 $20.03

3rd High
Regular 0 - 0.6 MCF(1) $25.91 $27.62 $30.33 $33.00 $35.63
Additional MCFs $55.41 $55.41 $57.63 $59.39 $60.57
Homestead All MCFs $11.52 $13.81 $16.68 $19.80 $23.16

MFSG 11-4 Cleveland Division of Water


Rate District 2011 2012 2013 2014 2015
Master Meter Communities
Bedford All MCFs $31.54 $31.54 $31.54 $32.53 $33.35
Chagrin Falls All MCFs $35.76 $35.76 $36.14 $37.51 $38.56
Cleveland Heights All MCFs $31.50 $31.50 $31.50 $32.53 $33.35
Lakewood All MCFs $27.10 $27.10 $27.10 $27.10 $27.10
Geauga County All MCFs $38.72 $38.72 $38.72 $38.72 $38.72
Emergency Standby Suburbs
Berea All MCFs $39.44 $39.44 $39.44 $39.44 $39.44
Lake County All MCFs $38.36 $38.36 $38.36 $38.36 $38.36
Lorain County All MCFs $39.44 $39.44 $39.44 $39.44 $39.44
North Ridgeville All MCFs $31.41 $31.41 $31.41 $31.41 $31.41
Medina County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Summit County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Hudson All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
Portage County All MCFs $45.72 $45.72 $45.72 $45.72 $45.72
st
(1) Usage block change in 1 MCF reduced to 0.6 MCF begins on January 1, 2012.

• We recommend that CWD consider the following items to enhance the current assistance
programs.

o CWD should establish clear goals for its affordability assistance programs.
o The Affordability Program discount should be increased from the current 20%
percent level to 40%.
o CWD should develop a marketing plan to promote its Homestead and
Affordability Programs.
o CWD should consider offering longer term payment plans without interest
charges for customers who may be unable to pay their bills.
o CWD should consider offering budget billing.
o CWD should consider moving to monthly billing, especially with the impending
implementation of an AMR system.
o CWD should consider offering crisis vouchers to customers who have a
temporary or one-time financial problem with bill payment.

• The financial health and viability of CWD will be significantly impaired with the
continued utilization of the current schedule of rates and fees. We recommend that CWD
implement the proposed increases to water rates and fees expeditiously given the dire
financial consequences that will result should increases be delayed or not adopted.

MFSG 11-5 Cleveland Division of Water