#2 Action to file water rate increase
DUM
ACCOUNTING DIVISION MEMORAN
April 17, 2009
TO: City Council
FROM: Patty Lynch, Comptroller
SUBJECT: Action to Authorize the City Manager to File a Water Rate Increase
with the Public Service Commission
Executive Summary
The proposed 2009 Water Utility budget included a recommendation to adjust
rates. This increase is necessary because of the decrease in water sales, and
increase in operating expenses and capital improvements. A utility’s earnings
are generally measured by a rate of return on the net utility plant. The resulting
customer rates are designed to recover operation and maintenance expense,
depreciation expense, taxes, and the rate of return. The rate of return is used for
payment of debt principal and interest payments and to fund pay-as-you go
equipment replacements and capital improvements
In order to maintain the financial integrity of the Water Utility, we have
determined that it is necessary to adjust our rate structure by increasing rates
14.75% effective during the third quarter of 2009 (upon issuance of the PSC rate
order). These actions will permit the Utility to generate a return of 5.4% on its net
investment in plant and infrastructure assets and will generate an additional
$881,361 of annual revenue.
Recommendation
Staff recommends that council authorize the City Manager to file a 14.75% rate
increase with the PSC.
Suggested Motion
Move to authorize the City Manager to file a water rate increase with the Public
Service Commission (PSC).
City Manager Recommendation
After reviewing the background information, I recommend that the City Council
proceed with authorizing staff to file the rate increase. The City would remain the
third lowest rate out of our peer cities with the increase.
Background
In 2007, the Water Utility was granted a rate increase, which was intended to
permit the Utility to earn a 6.0% rate of return on its net plant investment.
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Although 6.0% was authorized, the Water Utility’s actual rate of return was 4.28%
in 2008. Furthermore, without a rate adjustment, a 2.3% rate of return is
projected for 2009. This situation would restrict the Utility’s ability to finance
future capital improvements and meet our current debt service requirements.
Since the 2007 rate case was prepared, operating expenses have increased
9.5%, primarily due to increases in economic adjustments ($276,645), cost of
chemicals ($39,500), and depreciation ($90,612). During this same period, sales
of water have decreased by 12.6%. The loss of water sales is due primarily to the
shut down of the General Motors plant. General Motors constituted about 9% of
the annual water sales or 6% of the total water revenues (in 2008 this amounted
to 343 million gallons and $362,192).
The table below shows the Utility’s rate of return, water sales, and operating
income for 2007 rate study through 2009. The data reported for 2009 does not
reflect the proposed rate increase. Staff will request that the rate of return
authorized by the PSC drop from 6.0% to 5.4%. This rate of return will minimize
the impact of the rate increase to the customer, while still provide adequate
revenue for debt service and capital improvements.
JANESVILLE WATER UTILITY RATE INDICATORS
2007 2007 2008 2009
Rate Study Actual Actual Projected
Authorized Rate of Return 6.00% 6.00% 6.00% 5.40%
Incurred Rate of Return 4.68% 4.28% 2.30%
Water Sales (Million CCF) 5.03 4.73 4.39 4.40
Operating Revenue $6,556,910 $5,915,168 $6,048,253 $6,090,625
Operating Expenses $4,965,051 $4,800,678 $4,940,239 $5,434,385
Operating Income $1,591,859 $1,114,490 $1,108,018 $ 656,240
The City of Janesville is also eligible for a Simplified Rate Increase which would
allow the City to implement a portion of the required rate increase more quickly.
The City would be eligible for a 3.8% increase effective 45 days after the
application was filed with the PSC. This would increase the average residential
bill by $1.52 per quarter. Staff recommends against filing the Simplified Rate
Increase because it doesn’t generate sufficient revenue to meet the Utility’s
financial requirements and would need to be followed shortly by another rate
increase of about 11%.
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Analysis
Currently, the average residential customer’s quarterly water bill is $40.00, which
consists of a $35.10 charge for water and $4.90 for public fire protection. The
following table compares our current average water bill to that of our peer cities.
WATER RATE
2008 PEER CITY COMPARISON
TOTAL PUBLIC FIRE GRAND
CITY WATER/QTR PROTECTION/QTR TOTAL
Fond du Lac $125.00 $14.10 $139.10
Appleton $114.75 $14.31 $129.06
Oshkosh $100.25 $5.50 $105.75
Racine $52.00 $18.00 $70.00
Green Bay $62.00 $7.20 $69.20
Waukesha $55.97 $11.79 $67.76
Wausau $56.00 $8.70 $64.70
Beloit $50.90 $11.94 $62.84
Kenosha $50.75 $7.35 $58.10
Eau Claire $48.35 $9.46 $57.81
Manitowoc $43.70 $8.40 $52.10
Sheboygan $34.25 $6.30 $40.55
La Crosse $35.25 NC $35.25
Janesville (Current Rates)
$35.10 $4.90 $40.00
AVERAGE PEER CITY
$63.78 $11.19 $74.97
Janesville (Proposed Rates)
$40.28 $5.62 $45.90
(Based on average residential quarterly consumption of 2,500 cubic feet and a
5/8 inch meter)
When compared to our peer cities, our current rates are very reasonable. As a
part of the rate review process, the Wisconsin Public Service Commission will
prepare a cost of service study that determines the actual rate structure. The
proposed rates listed in the table above assume the 14.75% increase will apply
to the average residential customer, or $5.90 per quarter. City staff plans to
request the PSC implement a water conservation rate structure which will help
mitigate the rate increase impact to our low volume residential customers.
Please find attached a comparison of our average residential quarterly bill,
including both the water and wastewater charges, to that of our peer cities
(Attachment I).
Cc: Eric J. Levitt, City Manager
Jacob J. Winzenz, Director of Administrative Services
Daniel L. Lynch, Director of Utilities
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