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19 - Water & Wastewater Cost of Service StudyItem No. 19 TO: Mayor & City Council Grayson Path, City Manager FROM: Gene Anderson, Finance Director Doug Harris, Utility Director SUBJECT: WATER & WASTEWATER COST OF SERVICE STUDY DATE: June 22, 2020 BACKGROUND: The City Council heard a presentation from our independent rate consultant, Chris Ekrut of NewGen Strategies & Solutions, LLC at their June 8, 2020 meeting. Pursuant to our water contracts, the consultant conducts a cost of service study every year. In addition to the larger users that we are contracted with, the study determines the recommended water and wastewater rates for all other water and wastewater customer classes: residential, commercial, and industrial. The study is an important financial tool enabling the City to maintain the financial integrity of the Water & Sewer (Wastewater) Fund. This annual rate study and the City's rate maintenance policy are looked upon favorably by Moody's and other credit rating agencies when the City is attempting to issue bonded indebtedness. The City's current bond rating with Moody's is Aa3. Any decrease in this rating would cost the City millions of dollars in additional interest over the life of a large bond issue such as the one contemplated to fund a new wastewater treatment plant in the near future. Adjusting the rates in accordance with the consultant's recommendations and our 2010 Rate Maintenance Policy are critical and healthy steps to provide basic care and maintenance to our Water and Wastewater system and ensure that the City is able to meet its debt payment obligations. Our water and wastewater systems are critical infrastructure needed by every individual and business in Paris. STATUS OF ISSUE: At the June 8th meeting, the Council heard a presentation on the 2020 Cost of Service Study. The presentation made it clear that current water and wastewater rates are insufficient to cover the costs of operating the system. Two rate scenarios were put forth by the rate consultant for consideration. Scenario 1 rates would generate revenue sufficient to cover the full cost of operating the system as well as maintain reserves for debt service payment. Scenario 2 rates would generate revenue sufficient to meet the requirements of our rate maintenance policy but would not cover the full cost of the service. Scenario 2 would require the City to utilize $306,445 of its reserves to cover the revenue shortfall. Choosing Scenario 2 rates would benefit customers in the short run, but with the impending debt issue for the Wastewater Treatment Facility, this benefit would be very temporary at best. The $306,445 from reserves used to implement Scenario 2 will have to be recaptured in future rate increases as a new debt issue would trigger a larger debt service coverage amount, a new interest & sinking fund, and a larger reserve fund, all of which is required per our Policy. The amounts of these increases are directly tied to the amount of debt issued. For example, $60 million in debt sold in the open market with a 30 year payback would cause the debt service coverage amount to increase by $306,000, result in an annual principal & interest payment of $3,060,000, and require the reserve to likewise increase by $3,060,000. This increase to the reserve could be accumulated over a period of 5 years without adversely affecting our bond rating. If we were able to go through the Texas Water Development Board to issue the bonds, the debt service coverage amount would drop to $250,000, the annual principal & interest payment would drop to $2,500,000, and the reserve increase to be accumulated over 5 years would also be $2,500,000. Scenario 2 would impact this slightly, requiring us to rebuild what we would be giving up today in order to then proceed to this new required amount in the near future. To assist the Council in understanding the scope of what the Water and Wastewater Rates cover, the following is a list of the departments supported by the rates: 1. Warehouse 2. Water Billing & Collection 3. Water Treatment Plant 4. Water Distribution (replacement, extension, repair) 5. Wastewater Collection 6. Wastewater Treatment Plant 7. Lift Stations These seven departments have 72.5 full time equivalent employees which is 2.5 more employees than they had ten years ago. The 39 employees that work at the treatment plants keep it manned and operating 24 hours a day. The other departments operate a standard 8 hour day shift unless called out on emergencies. These departments are critical to providing, treating, servicing, replacing, extending, and responding to the Water and Wastewater System from source to water facility to distribution system to house, to collection system and ultimately to wastewater facility. In addition to personnel, there are primary costs associated with the water and wastewater system. For example, chemical costs. Nine different treatment chemicals are bid annually to obtain the most competitive prices possible. Electricity was bid out in 2018 through the Texas Coalition for Affordable Power (TCAP) and through 2022 the City is only paying 3.18 cents per kWh for electricity. We strive to hold costs down where possible. The current 2019-20 operating budget for the system is $11,266,001. Five years ago the 2015-16 operating budget was $10,816,708. The difference in those budgets is $449,293 or 4.15% over the five year period. But there are factors that impact residential, commercial, and industrial rates that are beyond our control. Examples are rainfall amounts, reduced consumption by customers, and how much each customer class uses of the system as a whole. In this year's study, you would find that all of our contract customers utilized less of the system than they used last year thereby shifting some fixed system costs away from them and to the other customer classes pressuring their rates upward. Looking forward to the Wastewater Treatment Plant, the City Manager, Utility Director, and Finance Director spoke with Garver Engineering and NewGen on Thursday, June 18th regarding potential Wastewater Rate scenarios to cover our operations as well as a new facility. It is strongly recommended that a new facility be built, more on this will be provided in a near future City Council meeting. We are currently experiencing an incredible low in interest rates throughout the market, we have also sent in a pre -application to pursue a revolving loan fund through the State which would further have great interest savings over a 30 year life. Nevertheless, we are currently looking at a very large expense to build the facility which will need to be supported by the Wastewater Rate. If the City were to approve proceeding with this project in 2020; design through completion would take 3-5 years. It is at that time we would experience the full impact of a debt service payment. It is strongly recommended that the City begin a healthy and gradual ascent in its Wastewater Rate to prepare itself for this ultimate expense, but more importantly to acclimate our users gradually over the span of 3-5 years rather than a sudden and drastic increase at the end. Ultimately, debt payments will be owed when they come due, therefore being prepared with the Wastewater Rate to afford these payments will prevent a drastic impact to the reserves or, much worse, to taxes. City Staff will do all it can to look for opportunities to find savings in the design and construction of the project, there will be some minor savings in efficiency through operation and maintenance brought on by a new facility, the drastic reduction in infiltration that is occurring between the City and the Facility currently will bring about some savings, and Staff will look for an opportunity to refinance existing debt during this time if rates continue to hold low. Ultimately though, it is the Staff and Engineer's recommendation that we strategically begin to address this much needed project now, including adjusting our rates, to avoid the ultimate situation of being forced to act by the TCEQ — or worse, suffer a failure of operation at the Wastewater Treatment Facility. Adjusting rates pursuant to Scenario 1 would be a step in managing the ultimate impact to users over the next 3-5 years. BUDGET: The rate study cost is $28,500 similar to previous years. Funds are budgeted in the Water Billing Office budget to pay for the study. OPTIONS: 1. Adopt Scenario 1 rates which cover the full cost of service of the water and wastewater system (note — this does not take in to account the Wastewater Treatment Facility, that will need to be examined if and when the Council approves the design to proceed). 2. Adopt Scenario 2 which meets the minimum amount of our rate maintenance policy but does not cover the full cost of service of the system and relies on reserves to make up the shortfall (note — again, this does not take in to account the WWTF). 3. Adopt a third scenario to be specified by the Council — City Staff will be available to discuss scenarios the council might have. RECOMMENDATION: The staff recommends the Council, given the long term forecast with the Wastewater Treatment Facility, adopt Scenario 1 rates. ORDINANCE NO. 2020 -Scenario 1 AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF PARIS, TEXAS, AMENDING SECTIONS 34-22(b), "WATER RATES," AND SECTION 34- 23(a), (b) AND (c), "SEWER RATES—FOR CUSTOMERS USING CITY WATER," OF CHAPTER 34 OF THE CODE OF ORDINANCES OF THE CITY OF PARIS, TEXAS TO REFLECT CHANGES RECOMMENDED BY THE 2020 WATER AND SEWER RATE STUDY; PROVIDING A REPEALER CLAUSE, A SEVERABILITY CLAUSE, A SAVINGS CLAUSE, A PENALTY CLAUSE; AND PROVIDING FOR AN EFFECTIVE DATE. WHEREAS, on the 8th day of June, 2020, the City Council of the City of Paris, Texas, was presented a water and sewer rate study prepared by NewGen Strategies and Solutions LLC, with certain findings and recommendations for proposed water and sewer rate increases (a copy of which is on file with City Finance Department); and, WHEREAS, on June 22, 2020, the City Council has determined that it is in the best interest of the City of Paris and its citizens to implement the proposed rates for water and sewer services recommended by the 2020 Water and Sewer Study by amending portions of Article II, "Service Charges," Chapter 34, "Water, Sewer, and Sewage Disposal," of the City of Paris Code of Ordinances; NOW THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF PARIS, TEXAS: Section 1. That the findings set out in the preamble to this ordinance are hereby in all things approved. Section 2. That Subsection (b) of Section 34-22 of the Code of Ordinances of the City of Paris, Texas, be, and the same is hereby amended to read in its entirety as follows: "Sec. 34-22. Water rates. "(b) Charges for water furnished by the City, measured in cubic feet, are established as follows based upon customer class and meter size and incorporate a base monthly cost which includes the cost for the first increment of water, and a cost per one hundred (100) cubic feet or portion of one hundred (100) cubic feet used above the first increment: "RESIDENTIAL CLASS BASE COST FOR FIRST SERVICE IN METER SIZE INCREMENT EXCESS OF BASE (Inches) (In Cubic Feet) (For Each Additional 100 Cubic Feet) 3/4 or less $12.47 for first 200 $ 4.59 Page 1 of 4 1 and Larger $ 60.85 for first 1,000 "COMMERCIAL/INDUSTRIAL CLASS BASE COST FOR FIRST METER SIZE INCREMENT (Inches) (In Cubic Feet) 3/4 or less $14.90 for first 200 1 through 2 $ 59.69 for first 1,000 3 $ 214.25 for first 3,000 4 $ 3,674.83 for first 100,000 6 $ 5,512.24 for first 150,000 8 and larger $ 7,349.65 for first 200,000 $ 4.59 SERVICE IN EXCESS OF BASE (For Each Additional 100 Cubic Feet) $ 4.50 $ 3.67 $ 3.67 $ 3.67 $ 3.67 $ 3.67 Section 3. That Subsections (a), (b) and (c) of Section 34-23 of the Code of Ordinances of the City of Paris, Texas, be, and the same are hereby amended to read in their entirety as follows: "Sec. 34-23. Sewer rates - For customers using City water. "(a) Charges for sewer service furnished by the City to residential, commercial and industrial customers shall be based upon customer class and meter size, incorporating a base monthly cost for the first increment of usage and a cost for each additional one hundred (100) cubic feet or portion of one hundred (100) cubic feet above the first increment, as follows: METER SIZE (Inches) 3/4 or less 1 and Larger METER SIZE (Inches) 3/4 or less 1 through 2 Larger than 2 "RESIDENTIAL CLASS BASE COST FOR FIRST INCREMENT In Cubic Feet) $13.99 for first 200 $ 69.10 for first 1000 SERVICE IN EXCESS OF BASE (For Each Additional 100 Cubic Feet) $ 6.91 $ 6.91 "COMMERCIAL/INDUSTRIAL CLASS BASE COST FOR FIRST INCREMENT (In Cubic Feet) $18.62 for first 200 $ 71.70 for first 1000 $143.40 for first 2,000 Page 2 of 4 SERVICE IN EXCESS OF BASE (For Each Additional 100 Cubic Feet) $ 7.17 $ 7.17 $ 7.17 "(b) Monthly residential customers' wastewater volume for purposes of assessing the sewer charge shall be based upon one hundred percent (100%) of the actual metered potable water consumption averaged for the preceding November, January, and February consumption, which shall be known as the "flat winter average." Customers that do not have recorded water usage for each of the winter average months will have their winter average calculated based on the residential class average of 534 cubic feet. "Monthly commercial and industrial customers' wastewater volume shall be based upon one hundred (100) percent of the actual metered potable water consumption, except those customers whose wastewater is metered, and their volume shall be based upon one hundred (100) percent of the metered wastewater. The former shall be billed for one hundred (100) percent of the metered potable water and the latter shall be billed for one hundred (100) percent of the metered wastewater. "(c) Users desiring to discharge sewage into the City's sewerage system, the strength of which sewage exceeds two hundred fifty (250) parts per million biochemical oxygen demand (BOD), two hundred fifty (250) parts per million of total suspended solids, (TSS), or thirty (30) parts per million of ammonia (NH3), and which is acceptable under article III of this chapter, may do so upon written permission of the city and by paying a monthly treatment charge in the amount of ninety-seven cents ($0.97) per pound of biochemical oxygen demand (BOD) in excess of the allowable biochemical oxygen demand (BOD); fifty cents ($0.50) per pound of total suspended solids (TSS) in excess of the allowable total suspended solids (TSS); and thirty-four cents ($0.34) per pound of ammonia (NH3 ) in excess of the allowable ammonia strength. The city shall make the necessary tests of the user's sewage strength to determine this charge. The charge prescribed by this subsection shall be in addition to the charges prescribed in subsection (a) hereof." Section 4. That water and sewer rates established in Sections 2 and 3 above shall be effective beginning with July 1, 2020 consumption. Section S. All provisions of the ordinances of the City of Paris, Texas in conflict with the provisions of this ordinance are hereby repealed, and all other provisions of the ordinances of the City of Paris not in conflict with the provisions of this ordinance shall remain in full force and effect. Section 6. The repeal of any ordinance or part of ordinances affected by the enactment of this ordinance shall not be construed as abandoning any action now pending under or by virtue of such ordinance or as discontinuing, abating, modifying, or altering any penalty accruing or to accrue, or as affecting any rights of the municipality under any section or provisions of any ordinance at the time of passage of this ordinance. Page 3 of 4 Section 7. It is the intention of the City Council of the City of Paris that this ordinance, and every provision hereof, shall be considered severable, and the invalidity or partial invalidity of any section, clause, or provisions of this ordinance shall not affect the validity of any other portion of this ordinance. Section 8. Any person violating any of the provisions of this ordinance shall be guilty of a Misdemeanor and, upon conviction, shall be fined in accordance with Section 1-6 of the Code of Ordinances and each and every day's continuance of any violation of the above -enumerated section(s) shall constitute and be deemed a separate offense. Section 9. Introduced and read on June 22, 2020, at a regular meeting of the City Council of the City of Paris Section 10. That this ordinance shall become effective from and after its passage and publication as required by law. PASSED AND ADOPTED this 22nd day of June, 2020. ATTEST: Janice Ellis, City Clerk APPROVED AS TO FORM: Stephanie H. Harris, City Attorney Steven J. Clifford, M.D., Mayor Page 4 of 4 ORDINANCE NO. 2020 -Scenario 2 AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF PARIS, TEXAS, AMENDING SECTIONS 34-22(b), "WATER RATES," AND SECTION 34- 23(a), (b) AND (c), "SEWER RATES—FOR CUSTOMERS USING CITY WATER," OF CHAPTER 34 OF THE CODE OF ORDINANCES OF THE CITY OF PARIS, TEXAS TO REFLECT CHANGES RECOMMENDED BY THE 2020 WATER AND SEWER RATE STUDY; PROVIDING A REPEALER CLAUSE, A SEVERABILITY CLAUSE, A SAVINGS CLAUSE, A PENALTY CLAUSE; AND PROVIDING FOR AN EFFECTIVE DATE. WHEREAS, on the 8th day of June, 2020, the City Council of the City of Paris, Texas, was presented a water and sewer rate study prepared by NewGen Strategies and Solutions LLC, with certain findings and recommendations for proposed water and sewer rate increases (a copy of which is on file with City Finance Department); and, WHEREAS, on June 22nd, 2020, the City Council has determined that it is in the best interest of the City of Paris and its citizens to implement the proposed rates for water and sewer services recommended by the 2020 Water and Sewer Study by amending portions of Article II, "Service Charges," Chapter 34, "Water, Sewer, and Sewage Disposal," of the City of Paris Code of Ordinances; NOW THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF PARIS, TEXAS: Section 1. That the findings set out in the preamble to this ordinance are hereby in all things approved. Section 2. That Subsection (b) of Section 34-22 of the Code of Ordinances of the City of Paris, Texas, be, and the same is hereby amended to read in its entirety as follows: "Sec. 34-22. Water rates. "(b) Charges for water furnished by the City, measured in cubic feet, are established as follows based upon customer class and meter size and incorporate a base monthly cost which includes the cost for the first increment of water, and a cost per one hundred (100) cubic feet or portion of one hundred (100) cubic feet used above the first increment: "RESIDENTIAL CLASS BASE COST FOR FIRST SERVICE IN METER SIZE INCREMENT EXCESS OF BASE (Inches) (In Cubic Feet) (For Each Additional 100 Cubic Feet) Page 1 of 4 3/4 or less $11.97 for first 200 1 and Larger $ 58.37 for first 1,000 "COMMERCIAL/INDUSTRIAL CLASS BASE COST FOR FIRST METER SIZE INCREMENT (Inches) (In Cubic Feet) 100 Cubic Feet) 3/4 or less $14.32 for first 200 1 through 2 $ 57.25 for first 1,000 3 $ 205.52 for first 3,000 4 $ 3,530.00 for first 100,000 6 $ 5,295.00 for first 150,000 8 and larger $ 7,060.00 for first 200,000 $ 4.40 $ 4.40 SERVICE IN EXCESS OF BASE (For Each Additional $ 4.31 $ 3.53 $ 3.53 $ 3.53 $ 3.53 $ 3.53 Section 3. That Subsections (a), (b) and (c) of Section 34-23 of the Code of Ordinances of the City of Paris, Texas, be, and the same are hereby amended to read in their entirety as follows: "Sec. 34-23. Sewer rates - For customers using City water. "(a) Charges for sewer service furnished by the City to residential, commercial and industrial customers shall be based upon customer class and meter size, incorporating a base monthly cost for the first increment of usage and a cost for each additional one hundred (100) cubic feet or portion of one hundred (100) cubic feet above the first increment, as follows: 'RESIDENTIAL CLASS BASE COST FOR FIRST SERVICE IN METER SIZE INCREMENT EXCESS OF BASE (Inches) In Cubic Feet) (For Each Additional 100 Cubic Feet) 3/4 or less $13.82 for first 200 $ 6.82 1 and Larger $ 68.24 for first 1000 $ 6.82 "COMMERCIAL/INDUSTRIAL CLASS BASE COST FOR FIRST SERVICE IN METER SIZE INCREMENT EXCESS OF BASE (Inches) (In Cubic Feet) (For Each Additional Page 2 of 4 100 Cubic Feet) 3/4 or less $18.40 for first 200 $ 7.08 1 through 2 $ 70.82 for first 1000 $ 7.08 Larger than 2 $141.65 for first 2,000 $ 7.08 "(b) Monthly residential customers' wastewater volume for purposes of assessing the sewer charge shall be based upon one hundred percent (100%) of the actual metered potable water consumption averaged for the preceding November, January, and February consumption, which shall be known as the "flat winter average." Customers that do not have recorded water usage for each of the winter average months will have their winter average calculated based on the residential class average of 534 cubic feet. "Monthly commercial and industrial customers' wastewater volume shall be based upon one hundred (100) percent of the actual metered potable water consumption, except those customers whose wastewater is metered, and their volume shall be based upon one hundred (100) percent of the metered wastewater. The former shall be billed for one hundred (100) percent of the metered potable water and the latter shall be billed for one hundred (100) percent of the metered wastewater. "(c) Users desiring to discharge sewage into the City's sewerage system, the strength of which sewage exceeds two hundred fifty (250) parts per million biochemical oxygen demand (BOD), two hundred fifty (250) parts per million of total suspended solids, (TSS), or thirty (30) parts per million of ammonia (NH3), and which is acceptable under article III of this chapter, may do so upon written permission of the city and by paying a monthly treatment charge in the amount of,ninety-seven cents ($0.97) per pound of biochemical oxygen demand (BOD) in excess of the allowable biochemical oxygen demand (BOD); fifty cents ($0.50) per pound of total suspended solids (TSS) in excess of the allowable total suspended solids (TSS); and thirty-four cents ($0.34) per pound of ammonia (NH3 ) in excess of the allowable ammonia strength. The city shall make the necessary tests of the user's sewage strength to determine this charge. The charge prescribed by this subsection shall be in addition to the charges prescribed in subsection (a) hereof." Section 4. That water and sewer rates established in Sections 2 and 3 above shall be effective beginning with July 1, 2020 consumption. Section 5. All provisions of the ordinances of the City of Paris, Texas in conflict with the provisions of this ordinance are hereby repealed, and all other provisions of the ordinances of the City of Paris not in conflict with the provisions of this ordinance shall remain in full force and effect. Page 3 of 4 Section 6. The repeal of any ordinance or part of ordinances affected by the enactment of this ordinance shall not be construed as abandoning any action now pending under or by virtue of such ordinance or as discontinuing, abating, modifying, or altering any penalty accruing or to accrue, or as affecting any rights of the municipality under any section or provisions of any ordinance at the time of passage of this ordinance. Section 7. It is the intention of the City Council of the City of Paris that this ordinance, and every provision hereof, shall be considered severable, and the invalidity or partial invalidity of any section, clause, or provisions of this ordinance shall not affect the validity of any other portion of this ordinance. Section B. Any person violating any of the provisions of this ordinance shall be guilty of a Misdemeanor and, upon conviction, shall be fined in accordance with Section 1-6 of the Code of Ordinances and each and every day's continuance of any violation of the above -enumerated section(s) shall constitute and be deemed a separate offense. Section 9. Introduced and read on June 22, 2020, at a regular meeting of the City Council of the City of Paris Section 10. That this ordinance shall become effective from and after its passage and publication as required by law. PASSED AND ADOPTED this 22nd day of June, 2020. ATTEST: Janice Ellis, City Clerk APPROVED AS TO FORM: Stephanie H. Harris, City Attorney Steven J. Clifford, M.D., Mayor Page 4 of 4