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CM2018-076 WATER RATES INCREASE - CLARIFICATIONSCM 2018-076 4 C a 4 (!��Vaaqya, City of MEMORANDUM Chino Hills DATE: November 26, 2018 TO: Honorable Mayor and City Coun,il i FROM: Konradt Bartlam, City Man6ger RE: 2018 Water Rates - Clarifica ion of Recent Increases At the November 13, 2018 Council Meeting two residents expressed concerns regarding the recent implementation of new water rates. They noted that their rate increase for their first billing (after implementation of the new rates) exceeded 8 percent, which they understood to be the maximum the Water Utility would impose on its customers. There is also a misunderstanding in regards to the "Water Meter Maintenance Charge", which appears on their monthly billings. One resident also questioned the Water Utility Fund's reserves amount. It is perfectly understandable that such misunderstandings may occur when attempting to explain such a complex financial structure. To add to the complexity, the City's Water Utility complied with the State's direction to implement a budget - based rate structure in order to increase efficiencies and resiliencies during droughts. Throughout the water rate revision process, staff endeavored to educate the public on the upcoming rates. To that end, several public meetings were conducted, including three Public Works Commission meetings, two Council meetings, and a workshop. The following provides an overview of the three issues raised: The 8 Percent Annual Increase The reason for the higher than 8 percent increase for the first year is to account for several years of no increases. The prior 5 -year water rate period (2011-2016) allowed the Water Utility to raise rates at an annual amount of 9.9 percent. However, the rates weren't increased in 2015 and 2016, as staff recommended awaiting the completion of the new rate study. And, since the new rates didn't come into effect until October 1, 2018, residents experienced a total of three years with no increases. November 26, 2018 Page 2 CM2018-076 The 8 percent maximum annual increase was explained in all six of the above noted public meetings. What was also stressed, was the need to first adjust the rates up to those known as the 'Cost of Service" rates. At the time, the goal was to complete and implement a new rate structure on July 1, 2017. The study was completed on time and would have used the Cost of Service rates calculated for that year. However, the new utility billing system, which is designed to accommodate the new budget -based rate structure, was not. That resulted in a third year of no increase to the water rates. Meanwhile, the cost to purchase water, equipment and operate the utility continued to rise. That meant that the Cost of Service rates, which were intended to be in effect in 2017 needed to increase by 8 percent in October 2018. Consequently, customers experienced the increase due to the 2017 Cost of Service as well as the 8 percent increase in 2018, at the same time. The new rate calculations also needed to consider a different rate structure, which incorporates indoor and outdoor water budgets for each residential property. This budget -based structure considers water consumption in excess of the allotted indoor and outdoor budgets to be inefficient and the cost per gallon is higher than the cost for staying within the budget. This aspect further impacts the amount of increase each individual property may experience. Therefore, the actual increase from one customer to the next can vary, depending upon the efficiency of their water uses. In part, the goal of this structure is to positively influence customers' water -use habits. Water Meter Maintenance Charge It is important to note that the cost of water is comprised of two components. The first is the "commodity charge", which is the amount paid for the actual water. The second component is the "fixed charge", which is the amount needed to transport water from its source to the tap. This includes transporting and treating the water, operating the utility, maintaining the piping (hundreds of miles), wells, reservoirs, pump stations, and pressure regulating valves, to name a few. The fixed charge is also referred to as the "Water Meter Maintenance Charge". Each meter's fixed charge is related to its flow capacity. The Larger the meter, the larger the upstream system needs to be and, therefore, the higher the cost. Even when the customer does not use any water, the Water Utility incurs fixed costs in connection with operating and maintaining the system for each connection (homes, businesses, institutions, parks, etc.). November 26, 2018 Page 3 CM2O18-076 Funding water projects within the Capital Improvement Plan (CIP) is also part of this fixed charge. For example, in the current year's budget, the Water Utility is in the process of completing the design of a ($7.7 million) reservoir, replacing water saddles (connections between residential lines and main lines at $2.7 million), replacing mainlines ($1 million), water quality enhancement ($1.5 million) and installing a remote detection/operation system ($800,000), to name a few. Water Fund Reserves The Water Fund Reserves provide sufficient working -capital to fund the operation, maintenance and improvement of the water system. It also provides funding security in case of unforeseen emergencies, such as earthquakes, fires or other catastrophes. It is fiscally prudent to have sufficient reserves at all times, in order to avoid borrowing and paying high interest on loans. The Reserves fund is reviewed annually to ensure liquidity of the water enterprise. Staff will continue their efforts to educate any customer who wishes to glean a better understanding of the rates and the new structure. If you should have any questions, please contact Nadeem Majaj at (909) 364-2801 or myself at (909) 364-2611. ►u u, cc: Nadeem Majaj, Public Works Director