19 - Water & Wastewater Cost of Service Study

Home Browse Search

Item 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