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LRSP – Report September

Water Meter Study Update – Sept 10, 2016

  • Purchase of Additional Water Meters
    • Sensus sent us 130 additional meters
    • Previously, we had 139 meters in stock
    • Need 185 meters to complete the Phase I installations, plus ~40 meters to cover change of ownership through the end of 2016
    • Therefore, we need to buy at least 86 meters to cover us through 2016
    • Price for 130 = $16,706; price for 86 = $11,051 (Difference of $5,655)
    • LRPC recommended purchasing all 130 meters, resulting in 44 extra
    • LRPC recommended installing extra meters on vacation rental homes
  • Water Meter Usage Study
    • Plan to collect meter usage data from 59 study participants, potentially a few vacation rental installs, plus updating historical “full and part-time” usage from all homeowners with old meters (approx. 279 in 2015) through the Sept/Oct timeframe
    • Next, compile/analyze results and determine relevant water usage data applicable to
      developing rate structure in Nov timeframe
    • Determine new rate structure in Nov/Dec timeframe
    • Rates for 2017 will be based on number of meters installed as of Jan 2017, and the total costs estimated for the year
    • Goal for 2018 rates forward will be based on 100% meter installations, and the total annual estimated costs per year
  • LRPC recommendation for meter cost and installation
    • All new homeowners (50) have already paid $416.50 for their new meter (Did not pay for installation). The cost breakdown is as follows:
      • Meter $119.50
      • Transmitter $145.00
      • Box & Hardware $110.00
      • Misc. Fittings $42.00
      • Total $416.50
    • The remaining meters that need to be paid for include:
      • 59 Meter Study
      • 279 Phase I Project
      • 44 Extras purchased based on Sensus delivery of 130 meters
      • 1,278 Remaining needed to purchase for USDA Loan Project
      • Total of 1,660 (1,660 + 50 new homeowners = 1,710 total connections)
    • Recommend all remaining 1,660 shareholders pay the same amount ($416.50) for their meter, to be paid off within 6 months of installation starting Jan 2017
      • Meters installed in 2016 (Shareholder pays off from Jan-June 2017)
      • Meters installed in 2017/18 (Shareholder pays off from Jan-June 2018)
      • Based on latest Technical Memorandum, the total estimated cost included in the USDA loan request for 1,278 meters @ $1,002 each would be $1,280,556
        NOTE: METER COSTS AND USDA LOAN RATES BASED ON CURRENT ESTIMATES. FINAL COSTS AND RATES MAY VARY SLIGHTLY.
      • Recommend that all 1,710 share equally in the total cost of meters & installation
      • Therefore, after the 1,278 pay $416.50 up-front for their meter (Totaling $532,287) the balance to be funded by the USDA loan would be $748,269 (Worst Case)
      • Based on the USDA loan rate of $38.18 per $1,000 borrowed: 748 X $38.18 = $28,559/year
      • The shareholder payment amount per year would be: $28,559 / 1,710 = $16.70
      • Shareholder meter cost = $416.50 for meter, plus ~$16.70 (Annual Surcharge)
    • LRPC recommendation for USDA loan Infrastructure Improvements
      NOTE: METER COSTS AND USDA LOAN RATES BASED ON CURRENT ESTIMATES. FINAL COSTS AND RATES MAY VARY SLIGHTLY

      • LRPC was not in favor of initial Main Line Technical Memorandum because it did not include all remaining streets requiring infrastructure improvements
      • Goal is to complete entire project through USDA loan, and have all 2,025 members share equally in the cost. Would not be fair to charge shareholders not receiving upgrades
      • MC Engineering re-calculated Tech Memo (i.e., Option 2) to include upgrades on all streets
      • Total Option 2 USDA funding request estimated at $12,019,061 (worst case)
      • As stated in Option 2, the total meter requested amount was $1,325,511
      • Subtracting the meter requested amount equals $10,693,550
      • Based on USDA loan rate: 10,694 X $38.18 per $1,000 borrowed = $408,297/year
      • The shareholder payment amount per year would be: $408,297/2,025 = $201.63
      • Shareholder infrastructure improvements cost = $201.63 (Annual Surcharge)
    • USDA Loan Application Actions:
      • Required Reserve Estimates
      • Debt Service Reserve is equal to 1/10 th of the annual debt payment currently estimated at $437K. Therefore, the reserve would equal $43.7K
      • Short-Lived Asset Reserve (Estimate being worked by John Pedri & Dave)
      • Interim Financing Estimate
      • Financing prior to USDA Loan to cover design and other costs leading up to construction
      • Note: These costs to be reimbursed in USDA Loan
      • This action being worked by John Pedri & Dave
      • Recommendation: BLSMWC work with local contractors to encourage “quantity discounts” on the cost of connections from new meters to shareholder’s house. Offer these contractor’s names to shareholders to pursue discounted rates

      Rate Structure Development

      • Selecting the appropriate rate structure depends on at least the following three components:
        1. Defining the goals and objectives of the rate structure
        2. Evaluating the available alternatives in meeting these goals and objectives
        3. Understanding and communicating the potential effects on customers
      • Step 1 Defining Goals and Objectives
        In defining Goals & Objectives, it is important to understand the availability of water resources, level of current or future costs, customer & utility concerns, & any legal constraints on the utility.
        The following are the LRPC recommended “Rate Structure Goals & Objectives”

        1. Select rate structure that yields revenue in a stable and predictable manner
        2. Fund all our costs, including adequate reserves
        3. Select rate structure that promotes Conservation
        4. Maintain simplicity, while promoting fairness and equity
      • In addition, the LRPC recommends the following “Operational Goals & Principles”
        1. Treat our customers with respect
        2. Final water rates will not be established until the Company fully understands the expected outcomes and is able to explain it to the members
        3. Capital Recovery Financing Schedule to be based on life of the asset so that current customers do not pay a disproportional amount of the costs
        4. Fixed Cost Basis include Administrative costs, Capital Recovery schedule, Operations, Maintenance, Reserves, and Contingencies (Ex: Drought, Fire, Bark Beetle)
        5. Variable Costs are the costs to acquire and deliver and service water delivery to the members.
        6. Conservation will be managed not only by pricing schemes but by keeping the customer informed and other methods similar to the means used in the 2015 successful effort to reduce water consumption due to the drought
        7. Budgetary projections will be based on cash needs and reviewed annually
        8. Depreciation expense should not be included in the cash-needs budget approach for developing the rate structure
        9. In analyzing the continuing meter rates, alternative scenarios will be developed for a number of different situations including continued drought, significant reductions in water usage that would drive income below costs or major influx of new members (younger and prone to different usage patterns).
        10. Consider new rate structure includes applying the current concept of recovering base load costs up front at the beginning of each year. This concept is based on a readiness to serve and a prepaid usage factor based on meter and historic studies

      Cost-Based Water Utility Rate Making

      • Cost-based rates provide sufficient funding to allow communities to build, operate, maintain, and reinvest in their water system
      • Rates will be based on a “cost-based rates approach” which generates revenue from each class of customer (Residential & Commercial) in proportion to the cost to serve each class
      • Note: The LRPC has determined that the Snowflake HOA Facilities and SWCC meters will
        be classified as “Commercial Customers”
      • Objective of “cash-needs approach” for developing revenue requirements is to provide revenues sufficient to recover to cash requirements to meet all operation, maintenance, debt service payments, reserves and capital costs for a given period of time
      • In developing “Revenue Requirements” it is useful to consider the distinctions between “fixed and variable” cost categories
      • These distinctions help determine “base costs” and “extra capacity costs” to be included in the rate structure
      • Note: An exercise has been completed by both the LRPC and Dave/Lee that identifies our fixed and variable costs based on our current Chart of Accounts
      • At this point, the LRPC has determined that a “Base-Extra Capacity Method” is probably the most applicable approach for BLSMWC. This approach separates costs as follows:
      • Base Costs include total quantity of water used plus O&M expenses and capital costs to service customers under average load conditions
      • Extra Capacity Costs are associated with meeting peak demand rate of use requirements in excess of average base use
      • Customer Costs comprise those costs associated with serving customers, irrespective of the amount or rate of water use
      • Direct Fire Protection Costs apply solely to the fire protection function, usually directly related to fire hydrants, and related branch mains and valves