DRAFT FINAL
WATER RATE STUDY
BLACK & VEATCH PROJECT NO. 414264
PREPARED FOR
City of Newport Beach, CA
15 SEPTEMBER 2023
ATTACHMENT A
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City of Newport Beach, CA | Water Rate Study
BLACK & VEATCH | Table of Contents i
Table of Contents
Legal Notice ................................................................................................................................................. 1
1.0 Executive Summary .................................................................................................................... 1-1
1.1 Financial Plan ................................................................................................................... 1-1
1.2 Rate Design ..................................................................................................................... 1-2
1.3 Proposed Water Rates ..................................................................................................... 1-3
1.4 Customer Impact .............................................................................................................. 1-4
1.5 Summary .......................................................................................................................... 1-4
2.0 Introduction ................................................................................................................................. 2-1
2.1 Purpose ............................................................................................................................ 2-1
2.2 Water System ................................................................................................................... 2-1
2.3 Methodology ..................................................................................................................... 2-1
2.3.1 Financial Plan ................................................................................................... 2-1
2.3.2 Cost-of-Service Analysis .................................................................................. 2-1
2.3.3 Rate Design ...................................................................................................... 2-2
2.3.4 Rate Adoption ................................................................................................... 2-2 Water Utility .............................................................................................................................................. 2-1
3.0 Revenue and Revenue Requirements ....................................................................................... 3-1
3.1 Customer and Water Consumption .................................................................................. 3-1
3.1.1 Number of Customers ...................................................................................... 3-1
3.1.2 Billed Water Consumption ................................................................................ 3-2
3.2 Revenue under Existing Rates ........................................................................................ 3-2
3.3 Other Revenue ................................................................................................................. 3-3
3.4 Operating and Maintenance Expenses ............................................................................ 3-4
3.5 Capital Improvement Program ......................................................................................... 3-5
3.6 Transfers within the Fund ................................................................................................ 3-6
3.7 Reserves .......................................................................................................................... 3-6
3.8 Projected Operating Results ............................................................................................ 3-7
4.0 Cost-of-Service Analysis ............................................................................................................ 4-1
4.1 Cost of Service ................................................................................................................. 4-1
4.2 Functional Cost Components ........................................................................................... 4-2
4.3 Allocation to Cost Components ........................................................................................ 4-2
4.3.1 System Base, Max Day, and Max Hour Allocations ......................................... 4-2
4.3.2 Allocation of Operating and Maintenance Expenses ....................................... 4-3
4.3.3 Allocation of Capital Investments ..................................................................... 4-4
4.4 Units of Service ................................................................................................................ 4-8
4.5 Cost of Service Allocations ............................................................................................ 4-11
4.5.1 Units Costs of Service .................................................................................... 4-11
4.5.2 Distribution of Costs of Service to Customer Types ....................................... 4-11
5.0 Rate Design ................................................................................................................................. 5-1 12-11
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BLACK & VEATCH | Table of Contents ii
5.1 Existing Rates .................................................................................................................. 5-1
5.2 Proposed Rates ............................................................................................................... 5-1
5.2.1 Monthly Fixed Service Charge ......................................................................... 5-1
5.2.2 Monthly Private Fire Service ............................................................................ 5-3
5.2.3 Consumption Charge ....................................................................................... 5-9
5.3 Typical Monthly Costs under Proposed Charges .......................................................... 5-10
5.4 Summary of Rate Study ................................................................................................. 5-10
6.0 Appendix A – Cost of Service Analysis and Rate Tables ..................................................... 6-11
6.1 Fiscal Year 2026 ............................................................................................................ 6-11
6.2 Fiscal Year 2027 ............................................................................................................ 6-19
6.3 Fiscal Year 2028 ............................................................................................................ 6-27
LIST OF TABLES
Table 1-1 Proposed Five-Year Water Rate Schedule ...................................................................... 1-3 Table 1-2 Proposed Five-Year Recycled Water Rate Schedule ...................................................... 1-4 Table 1-3 Typical Residential Customer Monthly Bill Impacts ......................................................... 1-4 Table 3-1 Number of Customers by Meter Size ............................................................................... 3-1 Table 3-2 Annual Billed Water Consumption ................................................................................... 3-2 Table 3-3 FY 2024 Water, Recycled Water, and Private Fire Rates ............................................... 3-3 Table 3-4 Projected Water Revenue under Existing Rates ............................................................. 3-3 Table 3-5 Water O&M Escalation Factors ........................................................................................ 3-4 Table 3-6 Water O&M Expenses...................................................................................................... 3-5 Table 3-7 Water Capital Improvement Projects ............................................................................... 3-6 Table 3-8 Water Enterprise Fund ..................................................................................................... 3-9 Table 4-1 Cost of Service Revenue from Rates (FY 2025) ............................................................. 4-1 Table 4-2 Allocation Basis for O&M Expenditures ........................................................................... 4-5 Table 4-3 Allocation of O&M Expenditures (FY 2025) ..................................................................... 4-6 Table 4-4 Allocation Basis for Capital Costs .................................................................................... 4-7 Table 4-5 Allocation of Capital Costs (FY 2025) .............................................................................. 4-7 Table 4-7 Units of Service (FY 2025) ............................................................................................. 4-12 Table 4-8 Units Cost of Service (FY 2025) .................................................................................... 4-12 Table 4-9 Distribution of Costs to Customer Types (FY 2025) ...................................................... 4-13 Table 5-1 Costs within the Water Monthly Fixed Charge (FY 2025)................................................ 5-6 Table 5-2 Proposed Water Monthly Fixed Charge ........................................................................... 5-6 Table 5-3 Costs within the Recycled Water Monthly Fixed Charge (FY 2025) ................................ 5-7 Table 5-4 Proposed Recycled Water Monthly Fixed Charge ........................................................... 5-7 Table 5-5 Costs within the Fire Service Charge (FY 2025) ............................................................. 5-8 Table 5-6 Proposed Fire Service Charge ......................................................................................... 5-8 Table 5-7 Water Consumption Charge (FY 2025) ........................................................................... 5-9 Table 5-8 Recycled Water Consumption Charge (FY 2025) ........................................................... 5-9 Table 5-9 Recycled Water Pump Charge (FY 2025) ....................................................................... 5-9 12-12
City of Newport Beach, CA | Water Rate Study
BLACK & VEATCH | Table of Contents iii
Table 5-10 Proposed Consumption Charges ..................................................................................... 5-9 Table 5-11 Typical Water Monthly Bill (FY 2025)............................................................................. 5-10 Table 6-1 Allocation Basis for O&M Expenditures ......................................................................... 6-11 Table 6-2 Allocation of O&M Expenditures (FY 2026) ................................................................... 6-12 Table 6-3 Allocation Basis for Capital Costs .................................................................................. 6-13 Table 6-4 Allocation of Capital Costs (FY 2026) ............................................................................ 6-13 Table 6-5 Units of Service (FY 2026) ............................................................................................. 6-14 Table 6-6 Units Cost of Service (FY 2026) .................................................................................... 6-14 Table 6-7 Distribution of Costs to Customer Types (FY 2026) ...................................................... 6-15 Table 6-8 Costs within the Water Monthly Fixed Charge (FY 2026).............................................. 6-16 Table 6-9 Costs within the Recycled Water Monthly Fixed Charge (FY 2026) .............................. 6-16 Table 6-10 Costs within the Fire Service Charge (FY 2026) ........................................................... 6-17 Table 6-11 Water Consumption Charge (FY 2026) ......................................................................... 6-17 Table 6-12 Recycled Water Consumption Charge (FY 2026) ......................................................... 6-17 Table 6-13 Recycled Water Pump Charge (FY 2026) ..................................................................... 6-18 Table 6-14 Allocation Basis for O&M Expenditures ......................................................................... 6-19 Table 6-15 Allocation of O&M Expenditures (FY 2027) ................................................................... 6-20 Table 6-16 Allocation Basis for Capital Costs .................................................................................. 6-21 Table 6-17 Allocation of Capital Costs (FY 2027) ............................................................................ 6-21 Table 6-18 Units of Service (FY 2027) ............................................................................................. 6-22 Table 6-19 Units Cost of Service (FY 2027) .................................................................................... 6-22 Table 6-20 Distribution of Costs to Customer Types (FY 2027) ...................................................... 6-23 Table 6-21 Costs within the Water Monthly Fixed Charge (FY 2027).............................................. 6-24 Table 6-22 Costs within the Recycled Water Monthly Fixed Charge (FY 2027) .............................. 6-24 Table 6-23 Costs within the Fire Service Charge (FY 2027) ........................................................... 6-25 Table 6-24 Water Consumption Charge (FY 2027) ......................................................................... 6-25 Table 6-25 Recycled Water Consumption Charge (FY 2027) ......................................................... 6-25 Table 6-26 Recycled Water Pump Charge (FY 2027) ..................................................................... 6-26 Table 6-27 Allocation Basis for O&M Expenditures ......................................................................... 6-27 Table 6-28 Allocation of O&M Expenditures (FY 2028) ................................................................... 6-28 Table 6-29 Allocation Basis for Capital Costs .................................................................................. 6-29 Table 6-30 Allocation of Capital Costs (FY 2028) ............................................................................ 6-29 Table 6-31 Units of Service (FY 2028) ............................................................................................. 6-30 Table 6-32 Units Cost of Service (FY 2028) .................................................................................... 6-30 Table 6-33 Distribution of Costs to Customer Types (FY 2028) ...................................................... 6-31 Table 6-34 Costs within the Water Monthly Fixed Charge (FY 2028).............................................. 6-32 Table 6-35 Costs within the Recycled Water Monthly Fixed Charge (FY 2028) .............................. 6-32 Table 6-36 Costs within the Fire Service Charge (FY 2028) ........................................................... 6-33 Table 6-37 Water Consumption Charge (FY 2028) ......................................................................... 6-33 Table 6-38 Recycled Water Consumption Charge (FY 2028) ......................................................... 6-33 Table 6-39 Recycled Water Pump Charge (FY 2028) ..................................................................... 6-34 12-13
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BLACK & VEATCH | Table of Contents iv
LIST OF FIGURES
Figure 1-1 Water Enterprise Fund Financial Plan ............................................................................. 1-2 Figure 3-1 Water Fund Ending Balances .......................................................................................... 3-7 Figure 3-2 Status Quo Water Enterprise Fund Cash Flow ................................................................ 3-7 Figure 3-3 Water Enterprise Financial Plan .................................................................................... 3-10 Figure 4-1 Illustrative Example of Capacity Demands ...................................................................... 4-3 12-14
City of Newport Beach, CA | Water Rate Study
BLACK & VEATCH | Legal Notice LN-1
Legal Notice
Black & Veatch Management Consulting, LLC (Black & Veatch) has prepared this report for the City of Newport Beach (City), and it is based on information not within the control of Black & Veatch. The City has not requested Black & Veatch to make an independent analysis, verify the information provided to us, or render an independent judgment of the validity of the information provided by others. Because of this, Black & Veatch cannot, and does not, guarantee the accuracy thereof to the extent that such information, data, or opinions were based on information provided by others.
In conducting these analyses and in forming an opinion of the projection of future financial operations summarized in this report, Black & Veatch made certain assumptions on the conditions, events, a nd circumstances that may occur in the future. The methodology utilized in performing the analyses follows generally accepted practices for such projections. Such assumptions and methodologies are reasonable and appropriate for the purpose for which they are used. While we believe the assumptions are reasonable and the projection methodology valid, actual results may differ materially from those projected, as influenced by the conditions, events, and circumstances that occur. Such factors may include the City’s ability to execute the capital improvement program as scheduled and within budget, regional climate and weather conditions affecting water demand, and adverse legislative, regulatory, or legal decisions (including environmental laws and regulations) affecting the City’s ability to manage the system and meet water quality requirements.
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City of Newport Beach, CA | Water Rate Study
BLACK & VEATCH | Executive Summary 1-1
1.0 Executive Summary
The City of Newport Beach (City) commissioned Black & Veatch Management Consulting, LLC (Black & Veatch) to perform a Water Rate Study (Study) for its Water Utility. The Study included the development of a five-year financial plan, a cost-of-service analysis, and the design of rates. The specific objectives of the Study were to:
◼ Evaluate the adequacy of projected revenues under existing rates to meet projected revenue requirements.
◼ Develop a sound financial plan for the Water Utility covering five years for ongoing operations and planned capital improvements.
◼ Allocate the projected revenue requirements to the various customer types in accordance with their respective service requirements.
◼ Develop a suitable rate schedule that produces revenues adequate to meet financial needs while recognizing customer costs of service and regulatory considerations such as Proposition 218 and applicable judicial decisions.
1.1 Financial Plan
The City operates the utility as an individual self-supporting enterprise. As such, the utility develops a financial plan that provides sufficient revenues to meet all operation and maintenance (O&M) expenses, water purchases, debt service requirements, capital improvements from current revenues, and other expenditures.
The Study develops a financial plan that projects operating revenue, expenses, and capital financing costs for the utility over a five-year planning period beginning fiscal year (FY) July 1, 2023, and ending June 30, 2028.
The financial plan projects future rate revenues under existing rates, O&M expenses, debt service payments, payment to other City departments for services provided, and capital improvement program (CIP) requirements. In the projection of rate revenues, annual projections of customers and water consumption rely upon the City’s historical data and estimates of growth. Additionally, the Water Utility’s forecast incorporates efforts to continue meeting the conservation goals established by the State and the City’s Water Shortage Contingency Plan.
Black & Veatch worked with the City to develop a proposed financial plan to support the Water Utility’s O&M and capital needs, while minimizing impacts to customers. The financial plan supports the following activities:
◼ Operation and Maintenance Expenses: The Water Utility anticipates O&M expenses to increase from $30.4M in FY 2024 to $34.9M in FY 2028. Water production and purchases account for most of this increase, averaging 46% of O&M expenses.
◼ Debt Service: The Water Utility has no existing debt service, and no future debt is planned. ◼ Capital Improvements: The Water Utility plans to execute an average of $8.0M annually in capital projects from fiscal year (FY) 2024 to FY 2028.
◼ Reserves: The Water Utility plans to continue funding the operating fund reserve, capital fund reserve, and rate stabilization fund reserve.
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BLACK & VEATCH | Executive Summary 1-2
● The operating fund reserve is to help cover fluctuations in day-to-day expenses and to pay for additional imported water purchases if groundwater becomes unavailable. The scheduled target is 120 days of O&M expenses.
● The capital fund reserve is to help maintain enough funds to cover a portion of upcoming annual capital expenditures, smooth out the amount of capital infusion needed each year, and help mitigate unexpected capital costs. The scheduled target is 75% of the annual CIP. ● The rate stabilization fund reserve is to help mitigate future increases during revenue shortfalls that might result from lower-than-expected water sales. The scheduled target was established in FY 2019 to be equal to revenue loss due to a 30% of water use reduction, which equates to Stage 3 in the City’s Water Shortage Contingency Plan.
The Water Utility is proposing revenue adjustments to allow the enterprise to meet operating and capital needs and reserve targets, as shown in Figure 1-1.
Figure 1-1 Water Enterprise Fund Financial Plan
1.2 Rate Design
The Right to Vote on Taxes Act, also known as Proposition 218, was passed by California voters in 1996 and added Article XIIIC and Article XIIID to the California Constitution. These articles provide the regulatory framework that guides and informs the rate-setting process. The cost-of-service analyses provide the cost nexus for the proposed rate structures. The regulatory framework helps ensure cost recovery is proportionate to the cost of providing the service. 1 To minimize impacts, retain simplicity, and ensure the reasonable stability of revenue, Black & Veatch recommends the following rate structure.
◼ Monthly Fixed Charge: The Water Utility should retain the monthly fixed charge based on meter sizes for all customer types. The monthly fixed charge recovers portions of fixed cost elements such as
1 Black & Veatch is not a legal firm and interpretations of the legal requirements under Proposition 218 should be reviewed by legal counsel.
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BLACK & VEATCH | Executive Summary 1-3
operating and capital components, meter maintenance and services, meter reading, issuing bills, and maintenance and capacity costs associated with public fire protection. ◼ Consumption Charge: The Water Utility should maintain the uniform consumption charge for all customer types. The consumption charge recovers costs associated with the base and extra capacity demands.
◼ Fire Service Charge: The Water Utility should continue to utilize the fire service charge based on meter size for private fire service connections. The fire service charge will recover maintenance and capacity costs associated with private fire protection costs.
1.3 Proposed Water Rates
Table 1-1 summarizes the Water Utility’s recommended five-year rate schedules for water and private fire protection services. Table 1-2 presents the recommended recycled water rates. Rates are effective January 1st of each calendar year. The rates developed in this study focused on FY 2025 through 2028 as rates effective on January 1, 2024, were previously approved by City Council in the 2019 rate case 2.
Table 1-1 Proposed Five-Year Water Rate Schedule
2 City Council Meeting, November 19, 2019.
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BLACK & VEATCH | Executive Summary 1-4
Table 1-2 Proposed Five-Year Recycled Water Rate Schedule
1.4 Customer Impact
If approved, water rate adjustments will commence on January 1, 2024, and adjust annually on January 1st of each subsequent year. Table 1-3 illustrates the bill change to a typical single-family residential customer with a 5/8” metered connection and consuming 10 hundred cubic feet (HCF) per month.
Table 1-3 Typical Residential Customer Monthly Bill Impacts
1.5 Summary
The financial plan described herein reflect a balanced approach by the City to operate the Water Utility in a sustainable manner, while providing high quality services and minimizing customer bill impacts. Black & Veatch used industry standard principles for equitable cost-of-service allocations to calculate the proposed rates. Detailed explanations for these calculations are provided in the remainder of this report.
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City of Newport Beach, CA | Water Rate Study
BLACK & VEATCH | Introduction 2-1
2.0 Introduction
2.1 Purpose
The purpose of this report is (1) to project the future revenues of the Water Utility under existing rates and charges, project operating expenses and capital financing revenue requirements , and to examine the adequacy of projected revenues to meet these revenue requirements through FY 202 8; (2) to allocate these revenue requirements, or costs of service, for a representative test year to the various customer types in accordance with the respective service requirements that each class places on the systems; and (3) to develop a suitable schedule of water rates that will produce revenues adequate to meet the financial needs of the utility on the basis that recognizes customer costs of service and practical bill impact considerations.
2.2 Water System
The Water Utility provides water services to over 26,000 residential and non-residential customers. The City obtains potable water from three primary sources: local groundwater through Orange County Water District (OCWD), imported water from the Colorado River and/or the State Water Project through the Municipal Water District of Orange County (MWDOC), and recycled water purchased from OCWD. The water system infrastructure consists of 302 miles of transmission and distribution mains, four wells, three storage reservoirs with a total capacity of 202 million gallons, and five pump stations . The City relies on approximately 75% groundwater, 22% imported water, and approximately 3% recycled water.
2.3 Methodology
The rate-setting methodology employed by Black & Veatch is consistent with industry guidelines established by AWWA’s Principles of Water Rates, Fees, and Charges, M1 manual (M1 Manual). The manual is nationally recognized and provides recommendations and generally accepted practices in the water industry. The M1 Manual is used by rate practitioners as guidance on rate-making practices that can be used to address the unique circumstances of the communities served. An overview of the methodology is outlined below.
2.3.1 Financial Plan
Financial planning compares the
projected revenues of the utility under
existing conditions to its projected
operating expenses and capital
expenditures. This step tests the
adequacy of the current rates to recover
the utility's forecasted costs. If shortfalls
occur, revenue increases are
recommended until the utility is
financially stable.
2.3.2 Cost-of-Service Analysis
The cost-of-service analysis builds a link
between the utility's cost of service and
the proposed rates for each customer
type. This process takes individual budget cost items and allocates them based on their function.
Organizing the budget in terms of end function allows the creation of a nexus between the budget cost item and the rate.
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City of Newport Beach, CA | Water Rate Study
BLACK & VEATCH | Introduction 2-2
2.3.3 Rate Design
Rate design involves developing a rate
structure that equitably and
proportionately recovers costs from the
customers. The rate structure should
reflect a customer group's demand
profile and be resilient and flexible
enough to handle changing costs (i.e.,
operating and/or capital) and demand
scenarios (i.e., customers change their
demand on the system by contributing
less or more flow). Rate equity is
inherently built upon each customer's
relative use of the system. By designing
different rate components, the utility can balance affordability and equity.
2.3.4 Rate Adoption
In California, public utilities must meet procedural requirements for adopting new or increased rates for property-related fees under Proposition 218. Proposition 218 states that the utility must hold a public hearing to consider the proposed rates and provide written notice to all customers at least 45 days before the hearing. Any property owner or tenant directly liable to the public agency for payment of the property - related fees may submit a written protest to the new or increased rates until the close of the public hearing. The City Council may not adopt the proposed new or increased rates if property owners or tenants directly liable for payment submit written protests on behalf of more than 50 % of the properties upon which the proposed rates may be imposed.
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BLACK & VEATCH | Water Utility 3-1
Water Utility
3.0 Revenue and Revenue Requirements
To meet the costs associated with providing water services to its customers, the Water Utility derive revenue from a variety of sources, including water and recycled water user charges (rates), reimbursements, establishment fee, connection charges, turn-on charges, penalties, interest earned from the investment of available funds, and other miscellaneous revenues. The Water Utility is constantly looking for other sources of revenue, such as grants, to fund infrastructure investments. Black & Veatch has projected the future revenue generated in the Study by analyzing historical and future system growth in terms of the number of accounts and billed water consumption. This section also projects the expenses, or revenue requirements, necessary to operate and maintain the system, invest in capital improvements, make debt service payments, and cover other water systems expenses.
3.1 Customer and Water Consumption
3.1.1 Number of Customers
The City provides potable water services to 26,000 residential and non-residential customers and recycled water services to six customers. All customers connected to the water and recycled water systems do so through metered connections. The City bills customers based on the size of the metered connection and the consumption. Since the City bills customers based on the metered connection, the analysis included a review of historical accounts for customers and anticipated growth within the City. The City has seen a slight decline in population between 2020 and 2023 based on the State of California Department of Finance, E-5 Population and Housing Estimates. The analysis herein projects the total number of accounts to remain steady for the entire study period.
Table 3-1 summarizes the projected number of accounts for the Water Utility.
Table 3-1 Number of Customers by Meter Size
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BLACK & VEATCH | Revenue and Revenue Requirements 3-2
3.1.2 Billed Water Consumption
Table 3-2 shows the projected water and recycled water consumption for the Study period. In determining the projected water consumption, Black & Veatch analyzed historical water consumption patterns in conjunction with the 2020 Urban Water Management Plan, future water conservation requirements set by the City’s Water Shortage Contingency Plan, the continual requirement of Senate Bill (SB) 7x-7 and mandatory water conservation mandates. In 2016, after years of drought conditions, the State of California mandated cutbacks to all water purveyors to reduce water usage by 25%. This action led to a significant decline in water consumption. In 2017, the State of California formally lifted the water restrictions as it declared the drought over. Yet the mandatory cutback had a lasting effect on water conservation habits, leading to a continued decrease in overall water consumption.
In 2020, California again entered a drought. In 2022, to conserve water, the State of California adopted emergency regulations to increase water conservation and required urban water suppliers to implement Level 2 of their Water Shortage Contingency Plans. Shortly thereafter, the City moved to Level 2. In 2023, after record rainfall and snowpack levels, the State of California eased the drought restriction . Soon after, the City repealed Level 2 resolutions, providing relief to the community while promoting the wise use of water.
Many factors contribute to the City’s annual consumption. The City’s primary goal is to provide its residents with safe and reliable drinking water and encourage water conservation. Providing recycled water to existing and new customers is important for the City in supplementing potable water use. Overall, customers have done well to increase efficiency in the use of water resources.
Recognizing all the various factors contributing to water demand patterns and understanding the state requirements and water consumption has stabilized, the projected billed water consumption is expected to remain steady for the Study period. The City currently bills water consumption in hundred cubic feet (HCF).
Table 3-2 Annual Billed Water Consumption
3.2 Revenue under Existing Rates
Water user rates serve as the Water Utility's primary revenue source. Therefore, the level of future rate revenue is important in developing a long-range financial plan. Future water rate revenues are calculated using the system growth for the number of accounts and billed water consumption multiplied by the applicable existing rates. Since accounts and billed water consumption have no growth, rate revenue is expected to remain constant.
Table 3-3 presents the rates in effect for FY 2024 (effective January 1, 2024), which were approved by City Council on November 19, 2019, as part of the City’s 2019 Rate Study. The rates are composed of monthly fixed and uniform consumption charges. The monthly fixed service charge differs for water, recycled water, and private fire service. The consumption charge differs for water and recycled water. In addition, one recycled water customer pays a pump station charge associated with energy costs from a recycled water pump station that services them.
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BLACK & VEATCH | Revenue and Revenue Requirements 3-3
Table 3-3 FY 2024 Water, Recycled Water, and Private Fire Rates For the period under consideration for this study, the revenues under existing rates reflect the FY 2024 rate schedule, and are calculated as follows for each service:
◼ Monthly Fixed Service Charge = # Accounts by Meter Size (Table 3-1) x Current Rate (Table 3-3) x 12 ◼ Consumption Charge = Billed Usage (Table 3-2) x Current Rate (Table 3-3) Table 3-4 summarizes projected water rate revenue under existing rates. The projected Water Utility revenues under existing rates remains constant at $33.1M for the study period.
Table 3-4 Projected Water Revenue under Existing Rates
3.3 Other Revenue
Other sources of operating revenue include reimbursements, establishment fees, connection charges, turn-on charges, penalties, interest earned from the investment of available funds, and other miscellaneous revenues. Other operating revenues represent 1.8% of the Water Utility’s total revenue.
The City anticipates these revenues will remain relatively constant for the Study period. 12-24
City of Newport Beach, CA | Water Rate Study
BLACK & VEATCH | Revenue and Revenue Requirements 3-4
3.4 Operating and Maintenance Expenses
Table 3-6 summarizes the Water Utility’s projected O&M expense for the Study period. These expenses include salaries and benefits, maintenance and operations, internal service charges, and capital expenditures. The City anticipates that all O&M expenditures will escalate based on the factors identified in Table 3-5.
Table 3-5 Water O&M Escalation Factors
The following are subcategories that reside within the four main expense categories:
◼ Salaries and Benefits: These costs represent salaries and benefits for water staff assigned to operating and maintaining the water infrastructure system. ◼ Maintenance and Operations: These costs represent contract services, utilities, supplies and materials, maintenance and repairs, travel & training, and general expenses.
As part of supplies and materials, water supply costs represent an average of 46% of total costs. The Water Utility has three main sources of water: groundwater through OCWD, recycled water through OCWD, and imported water through MWDOC. The City targets approximately 75% groundwater, 22% imported water, and approximately 3% recycled water. ◼ Internal Service Charges and General Expenses: These costs represent internal costs to the Water Utility from other City departments for specific costs such as Finance Department customer service and billing, capital project admin, vehicle replacement, IT charges, and insurance. ◼ Capital Expenditures: These costs represent small capital expenditures for office equipment, fixtures, and computers.
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BLACK & VEATCH | Revenue and Revenue Requirements 3-5
Table 3-6 Water O&M Expenses
As shown in Table 3-6, the Water Utility’s O&M expenses increased from $30.4M in FY 2024 to $34.9M in FY 2028.
3.5 Capital Improvement Program
The Water Utility annually develops its five-year Capital Improvement Plan to identify water and recycled water system needs, including assessments, inspections, maintenance, and rehabilitation and replacement requirements. In 2019, the City completed its 30-year Water Master Plan, which identified $165.2M in capital projects in 2018 costs. Incorporating cost escalation over the 30 years, the City had planned to spend roughly $7.2M each year. Unfortunately, the City has had to readjust this annual spending by 5% each year due to higher-than-expected inflation. Therefore, the City plans to spend $40.2M over the Study period.
Table 3-7 summarizes the CIP for FY 2024 through FY 2028. The Water Utility is composed of many functions, of which transmission and distribution pipelines are significant elements. Therefore, of the total $40.2M, transmission and distribution pipelines account for 84.2% of the total projects. The City examines the water infrastructure system annually; therefore, CIP might change based on the current need.
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BLACK & VEATCH | Revenue and Revenue Requirements 3-6
Table 3-7 Water Capital Improvement Projects
3.6 Transfers within the Fund
The Water Utility will conduct transfers from the operating account and other accounts over the Study period. The other accounts are the Enterprise CIP, Capital, Operating Reserve, and Rate Stabilization (See Section 3.7 for further explanation on Operating Reserve and Rate Stabilization Reserve.) The Enterprise CIP and Capital account transfers represent money to cover planned CIP project expenditures.
These transfers do not represent direct operating expenses for either enterprise; therefore, they are treated as “below-the-line” cash flow items and not included as O&M expenses.
3.7 Reserves
A utility typically establishes reserves for several reasons, such as to cover shortfalls in operating revenues, maintain strong bond ratings, cover day-to-day operating costs, and ease the burden on ratepayers associated with large rate increases. Per the reserve level recommendations, the Water Utility will maintain the following three reserves:
◼ Operating Reserve represents working capital maintained by the Enterprise Fund to cover day-to-day expenses and maintain enough funds to cover accounts receivables, periods of lower-than-expected water sales, or unforeseen cost increases such as to pay for additional imported water purchases if groundwater becomes unavailable. The reserve will maintain a minimum balance of 120 days of operating expenses once fully funded.
◼ Capital Reserve represents funds to cover a portion of upcoming annual capital expenditures, smooth out the amount of capital infusion needed each year, and help mitigate unexpected capital costs.
Once fully funded, this reserve will maintain a minimum balance of 75% of the annual planned CIP. ◼ Rate Stabilization Reserve represents funds used to absorb lower-than-expected revenue due to short-term decreases in water sales. This reserve stabilizes water rate revenue and is an effort to avoid wide swings in rates charged to customers over time. When fully funded, the reserve will maintain a minimum balance of 30% of water use reduction.
Appropriate reserve levels help the Water Utility with liquidity, provide operational flexibility, and demonstrate fiscal responsibility to the rating agencies, which allows the City to access lower-cost funds if needed. Figure 3-1 shows the fund balances for all accounts after the recommended rate increases compared to the total target fund balance.
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City of Newport Beach, CA | Water Rate Study
BLACK & VEATCH | Revenue and Revenue Requirements 3-7
Figure 3-1 Water Fund Ending Balances
3.8 Projected Operating Results
The revenue requirements of the Water Utility consist of O&M expenses, capital expenditures, and reserve requirements. To fully understand the current condition of the Water Utility, it is important to examine the cash flow projections under the status quo scenario. As shown in Figure 3-2, the status quo conditions would project that the Water Utility would operate from an annual deficit position, thus requiring the use of reserves to keep operating. In this scenario, the Water Utility would not impose any revenue increases over the Study Period and continue to incur O&M expenses, pay for the execution of the planned CIP, and transfer to reserves.
Figure 3-2 Status Quo Water Enterprise Fund Cash Flow
The analyses performed for the Study indicate that the City should implement the proposed revenue increases shown in Table 3-8 if it wishes for the user rates to cover expenses and to keep the Water Utility in a balanced financial condition. The revenue increases represent the total revenue adjustment 12-28
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BLACK & VEATCH | Revenue and Revenue Requirements 3-8
needed to meet revenue requirements. The revenue adjustment does not represent adjustments to the individual rates but reflects the overall level of revenue needed to meet the Water Utilit y’s obligations.
The suggested revenue increases help the Water Utility meet the following goals:
◼ Meet budgeted operating obligations in the five FYs.
◼ Meet planned capital investments in the five FYs.
◼ Build up the operating reserve, capital reserve, and rate stabilization to reach their targets.
Table 3-8 summarizes the proposed Enterprise Fund for the Study Period. The Enterprise Fund consists of 1) Revenue and 2) Revenue Requirements.
Revenue
◼ Line 1 is the revenue under existing rates.
◼ Lines 2 through 6 are the additional revenues generated from the required annual increases. The additional revenue generated directly reflects the number of months the increase is effective for; therefore, the amount might be calculated at less than that stated amount. ◼ Line 8 is the total revenue generated from user charges. ◼ Line 11 represents other operating revenues.
◼ Line 12 represents the total revenues for the enterprise.
Revenue Requirements
◼ Line 14 represents O&M expenses. The O&M expenses include water production and water purchase.
◼ Lines 15 and 16 represent capital expenditures within the capital accounts. ◼ Line 18 represents the total revenue requirements for the enterprise. ◼ Line 21 represents the net cumulative reserve balance for the enterprise fund.
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BLACK & VEATCH | Revenue and Revenue Requirements 3-9
Table 3-8 Water Enterprise Fund
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BLACK & VEATCH | Revenue and Revenue Requirements 3-10
Figure 3-3 presents the proposed Water Enterprise Financial Plan.
Figure 3-3 Water Enterprise Financial Plan
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BLACK & VEATCH | Cost-of-Service Analysis 4-1
4.0 Cost-of-Service Analysis
4.1 Cost of Service
The cost-of-service analysis requires recovery of the City’s needed revenues from water and recycled water service rates, allocated to customer types according to the service rendered. An equitable rate structure allocates the capture of revenue requirements to customer types based on the quantity of water consumed, peak flows, the number of customer connections, and other relevant factors.
In analyzing the Water Utility’s cost of service for allocation to its customer types, Black & Veatch selected the annual revenue requirements for FY 2025 as the test year requirements to demonstrate the development of cost-of-service water rates. FY 2024 rates were already approved in the last rate study.
Table 4-1 summarizes the total costs of service that need to be recovered from water user rates for FY 2025.
Table 4-1 Cost of Service Revenue from Rates (FY 2025)
The total revenue requirement is shown in Line 4. As shown in Line 12, we deduct revenues from other sources to derive the net revenue requirement recovered through rates. Line 13 represents the net annual cash balance during the FY. This number is positive if the enterprise is drawing down funds already in the Enterprise Fund. The number will be negative if the enterprise is replacing funds. In th is case, the $231k figure indicates that the forecast is projecting a negative annual cash balance for the year. Line 14 represents the additional revenues generated if the revenue increase was effective for a full year versus only 5 months.
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BLACK & VEATCH | Cost-of-Service Analysis 4-2
4.2 Functional Cost Components
The first step in conducting a cost-of-service analysis involves analyzing the cost of providing water and recycled water service by system function to allocate the costs to the various customer types properly and, subsequently, design rates. As a basis for allocating costs of service among customer types, the study separates costs into the following five basic functional cost components: (1) Supply, (2) Base, (3) Extra Capacity, (4) Customer, and (5) Direct Assignment, described as follows:
◼ Supply costs are associated with paying OCWD and MWDOC for groundwater and import wate r, respectively.
◼ Base costs represent operating and capital costs of the system associated with service to customers to the extent required under constant or average annual load conditions without the elements necessary to meet water consumption variations or peak demands. ◼ Extra Capacity costs represent operating and capital costs incurred to meet peaking demands.
Peaking demands represent water consumption more than the average rate of use. ◼ Customer costs are those expenditures that tend to vary in proportion to the number of customers connected to the system. These include meter reading, billing, collecting, accounting, maintenance, and capital costs associated with meters and services.
◼ Directly assigned costs are specifically identified as those incurred to serve specific customers. These costs include conservation, recycled water supply and pump station, and fire protection.
4.3 Allocation to Cost Components
The next step of the cost-of-service process involves allocating each cost element to functional cost components based on the parameter or parameters having the most significant influence on the magnitude of that cost element. O&M expenses are allocated directly to appropriate cost compone nts. A detailed allocation of related capital investment is used as a proxy for allocating capital and replacement costs. The separation of costs into functional components provides a means for distributing such costs to the various types of customers based on their respective responsibilities for each type of service.
4.3.1 System Base, Max Day, and Max Hour Allocations
The water system consists of various facilities designed and operated to fulfill a given function. For the system to provide adequate service to its customers, it must be capable of meeting the annual volume requirements and the maximum demand rates placed on it. Because not all customers and types of customers exert maximum demand simultaneously, the capacities of the various facilities must meet the maximum coincidental demand of all customers. Each water service facility within the system has an underlying average demand exerted by the customers to whom the base cost component applies. For those facilities designed solely to meet average day demand, 100% of the costs go to the base cost component. Extra capacity requirements associated with coincidental demands more than average use consist of maximum daily and maximum hourly demand subcomponents.
The first step in determining the allocation percentages for volume-related cost allocations is to assign system peaking factors. The base element equals the average daily demand (ADD) and is assigned a value of 1.0. Based on the City’s 2019 Water Master Plan, the Water Utility’s maximum day (max day) demand is 1.85 times the ADD. The maximum hourly (max hour) demand is 2.6 times the ADD.
The costs associated with facilities required to meet maximum day demand are allocable to base and maximum day extra capacity, as shown below for the Water Utility. ◼ Base = (1.0/1.85) x 100 = 54.1%
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BLACK & VEATCH | Cost-of-Service Analysis 4-3
◼ Max Day = (1.85 – 1.0)/1.85 x 100 = 45.9%
These calculations indicate that the average or base use requires 54.1% of the capacity of facilities designed and generated to meet maximum day demand, and the remaining 45.9% meets maximum day extra capacity requirements.
The costs associated with facilities required to meet maximum hour demand are allocable to base, maximum day extra capacity, and maximum hour extra capacity as follows:
◼ Base = (1.0/2.6) x 100 = 38.5%
◼ Max Day = (2.6 – 1.0)/2.6 x 100 = 32.7%
◼ Max Hour = (2.6 – 1.85)/2.6 x 100 = 28.8%
Figure 4-1 Illustrative Example of Capacity Demands
For this Study, the average day, max day, and max hour factors are based on an average of three years of billing data. The calculated results, which followed the methodology outlined in Appendix A of the M1 Manual, indicate a max day factor of 1.90 (compared to the Master Plan value of 1.85) and a max hour factor of 2.54 (compared to the Master Plan of 2.60).
4.3.2 Allocation of Operating and Maintenance Expenses
When allocating O&M expenses, the M1 Manual refers to functional cost components. Simply put, these cost costs correspond to the activities that the Water Utility undertakes to provide its customers with water: identify the water source, pump it, treat it, distribute it to customers, bill for services, and collect revenues. Where possible, the O&M expenses for FY 2025 are directly allocated to the cost components to the extent possible. For those costs that are not directly allocated to one cost center, Black & Veatch identified cost elements specific to certain functions and assigned them based on the factors noted in Section 4.1 to allocate the operating expenses to the cost components. Consider, for example, a storage 12-34
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BLACK & VEATCH | Cost-of-Service Analysis 4-4
tank. Its purpose is to provide water during peak times. That is, when demand is greater than average , such as on a very hot summer day. The design of the storage tank is based on meeting maximum day needs. Therefore, the O&M costs for this tank are spread out between the base and max day elements.
The elements general to all operations were allocated based on the average of all other costs. The direct assignment represents conservation, recycled water, and fire protection. Table 4-2 shows the allocation basis for operating costs, and Table 4-3 shows the total allocation of operating costs serving water customers.
4.3.3 Allocation of Capital Investments
In allocating the capital investment for FY 2025, the existing fixed assets (which serve as a proxy for the capital investments) and proposed CIP are allocated directly to cost components to the extent possible.
The allocation of costs in this manner provides a basis for annual investment in water system facilities.
Using the existing fixed assets and CIP, the capital costs can be allocated using the total net system investment distribution across the functional cost components.
Table 4-4 shows the allocation basis for capital expenditures, and Table 4-5 shows the allocation of existing system investment serving water customers. The total net system investment of $ 116.3M shown on Line 12 for the Water Utility represents the Test Year original cost less accumulated depreciation of the system in service for existing fixed assets and proposed CIP. The total net system investment reflects the Water Utility’s fixed asset listing ending June 30, 2022. This value represents the original cost (book value) of the assets.
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BLACK & VEATCH | Cost-of-Service Analysis 4-5
Table 4-2 Allocation Basis for O&M Expenditures
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BLACK & VEATCH | Cost-of-Service Analysis 4-6
Table 4-3 Allocation of O&M Expenditures (FY 2025)
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BLACK & VEATCH | Cost-of-Service Analysis 4-7
Table 4-4 Allocation Basis for Capital Costs
Table 4-5 Allocation of Capital Costs (FY 2025)
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BLACK & VEATCH | Cost-of-Service Analysis 4-8
4.4 Units of Service
After allocating O&M and capital costs to the functional cost categories, the next step is identifying the billing determinants associated with the cost categories. The billing determinant for costs with a volume component (e.g., purchased water) will be HCF or HCF/day. Billing costs will use the number of bills.
Meter costs use an equivalent meter basis, and fire protection is based on equivalent hydrants.
To properly recognize the cost of service, each customer class receives its share of base, maximum day, peak hour, and customer costs. Following the allocation of costs, the total cost responsibility for each customer class is developed using unit costs of service for each cost function and subsequently assigning those costs to the customer types based on the respective service requirements of each. The number of units of service required by each customer class provides a means for the proportionate distribution of costs previously allocated to respective cost categories. The derivation of the units of service for FY 2025 is as follows:
◼ Supply and base costs vary with the volume of water consumed and distributed to the customers on that basis.
◼ Extra Capacity costs are those associated with meeting peak demand rates of water use and distributed to the customers based on the respective class capacity requirements more than average rates of use. The analysis followed the capacity factor methodology outlined in Appendix A of the AWWA M1 Manual to derive peak consumption information from the monthly consumption records in the City’s Customer Information System, which helps estimate the maximum day and peak hour ratios.
Note: The water max day factor of 1.90 and max hour factor of 2.55 are derived from historical consumption.
The methodology in AWWA M1 was used to determine the max day and max hour capacities for fire services. It was assumed that fire protection requires flows for two simultaneous fires: (1) 3,000 gallons per minute (gpm) for a minimum of 3 hours for a commercial customer and (2) 1,000 gpm for 2 hours for a single-family residential customer. These are fire demand requirements put forth by the 2019 Water Master Plan.
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BLACK & VEATCH | Cost-of-Service Analysis 4-9
Note: The max day and max hour demand for public fire is 87.5% of [3], and for private fire is 12.5% of [3], as shown below in private fire.
◼ Meter & service costs are those associated with operating and maintaining the water meters. Meter & service costs are distributed based on the estimated number of equivalent meters for each customer , which relies on the total number of meters serving respective types and the hydraulic capacity ratio of the meters to the ¾” inch meter. The equivalent meter ratios adopted in this analysis are consistent with City meter types and the AWWA M1 Manual.
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◼ Customer billing costs are distributed based on the number of bills for each customer.
Note: The City has monthly and bi-monthly customers; therefore, the connections are multiplied by 12 or 6. ◼ Conservation costs vary with the volume of water consumed and distributed to the customers on that basis. The consumption is noted in the supply and base section above. ◼ Recycled water costs vary with the recycled water consumed and distributed to the customers on that basis.
◼ Private fire-protection cost allocations use equivalent fire hydrants. A standard equivalent hydrant represents the fire flow through a 6” fire hydrant. Fire demand factors are derived based on the diameter of the connection raised to the 2.63 power.
Note: The City has monthly and bi-monthly customers; therefore, the connections are multiplied by 12 or 6. 12-41
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BLACK & VEATCH | Cost-of-Service Analysis 4-11
Table 4-6 summarizes the FY 2025 units of service for the various customer types.
4.5 Cost of Service Allocations
The Study applies the unit costs of service to each customer class’s respective service requirements to determine the cost of service for each customer class. The total unit costs of service applied to the respective requirements for each customer class results in the total cost of service for each customer class.
4.5.1 Units Costs of Service
The FY 2025 unit cost of service for each functional cost component is simply the total cost divided by the applicable units of service, as shown in Table 4-7. On Line 3, the total costs represent the cost that rates need to recover, as demonstrated in Table 4-1, Line 16. The net O&M cost includes O&M (including water purchase) less revenue from other sources and adjustments. Line 5 represents the unit costs for the entire water system regardless of customer type. After that, the unit costs are used to allocate the costs to the specific customer types.
4.5.2 Distribution of Costs of Service to Customer Types Applying the unit costs to the units for each customer class produces the customer class costs. This process is illustrated in Table 4-8, in which unit costs are applied to the customer class units of service for FY 2025. The costs attributable to each customer class reflect the functional cost components described in Section 4.1. Each customer class places a burden on the system in different ways; thus, the allocation of the units is representative of this burden.
An example of the application of unit costs is shown below for illustrative purposes.
Note: The numbers in the tables are rounded to the nearest hundred, but calculations are performed based on non-rounded values. Differences are due to rounding.
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BLACK & VEATCH | Cost-of-Service Analysis 4-12
Table 4-6 Units of Service (FY 2025)
Table 4-7 Units Cost of Service (FY 2025)
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BLACK & VEATCH | Cost-of-Service Analysis 4-13
Table 4-8 Distribution of Costs to Customer Types (FY 2025)
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BLACK & VEATCH | Rate Design 5-1
5.0 Rate Design
The initial consideration in deriving rate schedules for water service is establishing equitable charges to the customers commensurate with the cost of providing that service. While the cost -of-service allocations to customer types should not be construed as literal or exact determinations, they offer a guide to the necessity and extent of rate adjustments. Practical considerations sometimes modify rate adjustments by considering additional factors such as the extent of bill impacts, existing contracts, and historical local policies and practices.
5.1 Existing Rates
The existing rates of the Water Utility consist of a fixed component in the form of a monthly fixed service charge and a variable component in the form of a consumption charge. The monthly fixed service charge is based on meter size and applied regardless of consumption. The consumption charge is based on units of consumption (1 unit = 1 HCF = 748 gallons). The City has separate fixed charges for recycled water and private fire services. Table 3-3, presented earlier in this report, summarizes the existing water rates.
5.2 Proposed Rates
The cost-of-service analysis described in the preceding sections of this report provides a basis for the design of water rates.
5.2.1 Monthly Fixed Service Charge
The Water Utility provides water service to approximately 25,800 water service accounts and six recycled water accounts. These customers have dedicated water and recycled water line connections to the water systems. Therefore, water charges include capacity, water supply, public fire service costs, meter maintenance, and the cost of issuing bills. The following is a derivation of the different cost components that comprise the total charge. The numbers within the tables are rounded, but the calculations are based on non-rounded values. Differences are due to rounding.
5.2.1.1 Water Monthly Fixed Charge
◼ Capacity Cost: The water system is designed to meet peak consumption demands plus fire demand requirements. Therefore, the water system will have extra capacity when handling average flow demands. To distribute the capacity costs, meter ratios based on maximum operating capacities by meter size were used, as shown in AWWA M1, Table B-1. Using meter ratios, we recognize that as meter size increases, so does the capacity. For example, customers with a 4” meter expect to be able to use more water (at a higher flow capacity) than customers with a ¾” meter. Consequently, the City’s water system must maintain assets sized accordingly and capable of providing customers the level of service expected from their meter connection when the tap turns on .
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BLACK & VEATCH | Rate Design 5-2
◼ Meter & Services Cost: The water system incurs direct operating and maintenance costs associated with meter servicing and maintenance of the entire water system. The total meter & service costs are split by equivalent meters to determine the costs for water service.
◼ Public Fire Costs: The water system incurs annual direct operating and maintenance costs associated with fire protection for items such as servicing fire laterals and fire hydrants. The total direct fire protection costs are split between public and private based on equivalent hydrants. In addition, the water system is also designed to meet peak consumption demands and fire demand requirements. To determine fire protection demands for public fire service, the total demand is determined and split between public and private based on equivalent hydrants.
◼ Customer Billing Cost: The water system incurs direct operating costs associated with customer billing, such as meter reading, customer bills, customer service, etc. To determine the costs for water service, the total customer costs are split by bills generated.
Table 5-1 and Table 5-3 demonstrate the cost elements incorporated into the monthly service charge for FY 2025. Table 5-2 and Table 5-4 shows the five-year fixed service charge rate schedule. FYs 2026 to 2028 are derived using the same methodology described for FY 2025.
5.2.1.2 Recycled Water Monthly Fixed Charge
◼ Recycled Water Supply Cost: The recycled water system purchases recycled water from OCWD. The total recycled water supply costs are allocated by consumption. 12-46
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BLACK & VEATCH | Rate Design 5-3
◼ Meter & Services Cost: The recycled water system incurs direct operating and maintenance costs associated with meter servicing and maintenance of the entire water system. To determine the costs for recycled water service, the total meter & service costs are split by equivalent meters.
◼ Customer Billing Cost: The recycled water system incurs direct operating costs associated with customer billing, such as meter reading, customer bills, customer service, etc. To determine the costs for recycled water, the total customer costs are split by bills generated.
5.2.2 Monthly Private Fire Service
The Water Utility provides public fire protection services to everyone in the City of Newport Beach. In addition, the Water Utility provides fire service to 436 private fire service accounts. These customers have a dedicated water line connection to the water system specifically for fire protection. Circumstances where a private fire service account may be requested include commercial buildings with insurance requirements. The private fire service charge includes capacity costs, direct costs, the cost of meter maintenance, and the cost of issuing bills. The following is a derivation of the different cost components that comprise the total charge.
◼ Capacity Cost: The water system is designed to meet peak consumption demands plus fire demand requirements. To determine fire protection demands for private fire service, the total demand is determined and split between public and private based on equivalent hydrants. 12-47
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BLACK & VEATCH | Rate Design 5-4
◼ Private Fire Cost: The water system incurs annual direct operating and maintenance costs associated with fire protection, such as servicing fire laterals and fire hydrants. To determine direct fire protection costs for private fire service, the total direct fire protection costs are split between public and private based on equivalent hydrants.
◼ Meter & Services Cost: The water system incurs direct operating and maintenance costs associated with meter servicing and maintenance of the entire water system. To determine direct fire protection costs for private fire service, the total meter & service costs are split by equivalent meters.
◼ Customer Billing Cost: The water system incurs direct operating costs associated with customer billing, such as meter reading, customer bills, customer service, etc. To determine direct fire protection costs for private fire service, the total customer costs are split by bills generated.
Table 5-5 demonstrates the costs incorporated into the private fire service charge for FY 2025, and Table 5-6 shows the five-year rate schedule based on unit costs in future years. FYs 2026 to 2028 are derived using the same methodology described for FY 2025.
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BLACK & VEATCH | Rate Design 5-5
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BLACK & VEATCH | Rate Design 5-6
Table 5-1 Costs within the Water Monthly Fixed Charge (FY 2025)
Table 5-2 Proposed Water Monthly Fixed Charge
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BLACK & VEATCH | Rate Design 5-7
Table 5-3 Costs within the Recycled Water Monthly Fixed Charge (FY 2025)
Table 5-4 Proposed Recycled Water Monthly Fixed Charge
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BLACK & VEATCH | Rate Design 5-8
Table 5-5 Costs within the Fire Service Charge (FY 2025)
Table 5-6 Proposed Fire Service Charge
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BLACK & VEATCH | Rate Design 5-9
5.2.3 Consumption Charge
This consumption charge is designed to recover costs associated with water supply, base, and extra capacity demands. These include fixed and variable costs incurred by the water system while providing the average annual usage and peaking demands. While most costs are fixed, such as personnel and direct and indirect charges, variable costs represent most of the costs through water production and purchase.
Table 5-7 Water Consumption Charge (FY 2025)
Table 5-8 Recycled Water Consumption Charge (FY 2025)
Table 5-9 Recycled Water Pump Charge (FY 2025)
Table 5-10 shows the five-year rate schedule for both water and recycled water. FYs 2026 to 2028 are derived using the same methodology described for FY 2025.
Table 5-10 Proposed Consumption Charges
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BLACK & VEATCH | Rate Design 5-10
5.3 Typical Monthly Costs under Proposed Charges
Table 5-11 compares typical monthly costs under approved rates in FY 2024 and the proposed schedule of water user rates in FY 2025 derived in this study for residential customers. The typical single-family residential uses 10 units of water.
Table 5-11 Typical Water Monthly Bill (FY 2025)
5.4 Summary of Rate Study
This rate study proposes adjustments to the City’s water rates. A summary of actions and projections are as follows:
◼ Maintain the fixed service charge to reflect the nature of fixed costs associated with providing 24/7 water service and investments in infrastructure through the capital improvement program. ◼ Maintain the consumption charge to reflect the variable costs associated with operating costs , such as purchased water from wholesalers.
◼ Project water sales to remain flat in accordance with historical water demands and compliance with state water conservation targets.
◼ Operating Reserve. Strive to meet the fiscal policy of maintaining 33% of operating costs. ◼ Capital Reserves. Strive to maintain the minimum level of 75% of $7.5M capital costs. ◼ Rate Stabilization Reserve. Strive to meet the 30% of water use reduction target. ◼ Increase the annual investment in Capital Improvements from $7.5M to $10.2M by the end of the 5- year study period to reflect increased capital costs due to inflation. ◼ Maintain a comparable cost of delivering potable drinking water amongst neighboring water providers. 12-54
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-11
6.0 Appendix A – Cost of Service Analysis and Rate Tables The following tables represent the cost-of-service analysis and rate design tables for FY 2026 to FY 2028 using the methodology described in Sections 4.0 and 5.0.
6.1 Fiscal Year 2026
Table 6-1 Allocation Basis for O&M Expenditures
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-12
Table 6-2 Allocation of O&M Expenditures (FY 2026)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-13
Table 6-3 Allocation Basis for Capital Costs
Table 6-4 Allocation of Capital Costs (FY 2026)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-14
Table 6-5 Units of Service (FY 2026)
Table 6-6 Units Cost of Service (FY 2026)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-15
Table 6-7 Distribution of Costs to Customer Types (FY 2026)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-16
Table 6-8 Costs within the Water Monthly Fixed Charge (FY 2026)
Table 6-9 Costs within the Recycled Water Monthly Fixed Charge (FY 2026)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-17
Table 6-10 Costs within the Fire Service Charge (FY 2026)
Table 6-11 Water Consumption Charge (FY 2026)
Table 6-12 Recycled Water Consumption Charge (FY 2026)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-18
Table 6-13 Recycled Water Pump Charge (FY 2026)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-19
6.2 Fiscal Year 2027
Table 6-14 Allocation Basis for O&M Expenditures
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-20
Table 6-15 Allocation of O&M Expenditures (FY 2027)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-21
Table 6-16 Allocation Basis for Capital Costs
Table 6-17 Allocation of Capital Costs (FY 2027)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-22
Table 6-18 Units of Service (FY 2027)
Table 6-19 Units Cost of Service (FY 2027)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-23
Table 6-20 Distribution of Costs to Customer Types (FY 2027)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-24
Table 6-21 Costs within the Water Monthly Fixed Charge (FY 2027)
Table 6-22 Costs within the Recycled Water Monthly Fixed Charge (FY 2027)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-25
Table 6-23 Costs within the Fire Service Charge (FY 2027)
Table 6-24 Water Consumption Charge (FY 2027)
Table 6-25 Recycled Water Consumption Charge (FY 2027)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-26
Table 6-26 Recycled Water Pump Charge (FY 2027)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-27
6.3 Fiscal Year 2028
Table 6-27 Allocation Basis for O&M Expenditures
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-28
Table 6-28 Allocation of O&M Expenditures (FY 2028)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-29
Table 6-29 Allocation Basis for Capital Costs
Table 6-30 Allocation of Capital Costs (FY 2028)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-30
Table 6-31 Units of Service (FY 2028)
Table 6-32 Units Cost of Service (FY 2028)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-31
Table 6-33 Distribution of Costs to Customer Types (FY 2028)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-32
Table 6-34 Costs within the Water Monthly Fixed Charge (FY 2028)
Table 6-35 Costs within the Recycled Water Monthly Fixed Charge (FY 2028)
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BLACK & VEATCH | Appendix A – Cost of Service Analysis and Rate Tables 6-33
Table 6-36 Costs within the Fire Service Charge (FY 2028)
Table 6-37 Water Consumption Charge (FY 2028)
Table 6-38 Recycled Water Consumption Charge (FY 2028)
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Table 6-39 Recycled Water Pump Charge (FY 2028)
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