ATTACHMENT E: Revenue Requirements for Legal Review
PASADENA WATER AND POWER
Recommended Water Rate Adjustments
INTRODUCTION
This report documents the results of the internal revenue requirements review and rate sufficiency analysis. It provides a summary of the proposed rate actions and serves as a guide to the analysis performed.
BACKGROUND
As part of the development of the fiscal year ("FY") 2022 operating budget, Pasadena Water and Power ("PWP") conducted a revenue requirements analysis and rate sufficiency review, each of which determined that revenues from existing rates were insufficient to meet projected revenue requirements. This condition is a result of updated five-year water capital investment projections, water conservation assumptions, increasing operational costs including imported water supply costs from Metropolitan Water District ("MWD") and certain estimates about customer characteristics and water usage. PWP recommends water rate adjustments to improve the balance of revenue requirements with a reasonable impact on customer rates.
RATE STRUCTURE
PWP's rate structure is composed of three water service components: the Commodity charge, the Distribution & Customer ("D&C") charge, and the Capital Improvement Charge ("CIC"). The Commodity charge and CIC are both volumetric charges and the D&C charge is a fixed monthly or bi-monthly charge that varies by meter size. The D&C charge includes the Fire Protection Surcharge ("FPS").
Commodity Rates
The Commodity charge covers the extraction cost of local groundwater and the cost to purchase imported water from the MWD. It also recovers the cost of performing water quality testing and treatment to ensure that high quality water is delivered to Pasadena's customers.
D&C Rates
The D&C charge recovers the cost of operating and maintaining the infrastructure that treats, stores and reliably delivers water to the City's customers. This includes distribution mains and service lines connecting to individual homes and businesses, pumping stations that boost water across various elevations in the City and reservoirs where water is stored and treated. The D&C also covers the costs of customer service functions, including the call center, meter reading, billing and collections.
CIC Rates
The CIC recovers CIC eligible capital improvement projects as well as debt service on bonds issued by PWP.
FINANCIAL PLAN
In its analysis, staff developed a five-year financial plan as shown in Table 1 below.
Table 1: Financial Plan FY 2022 - FY 2026
FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Forecast Projected Projected Projected Projected
Retail Sales (Billing Unit) 11,141,066 10,554,694 9,968,322 10,018,164 10,068,255 Revenues:
Distribution and Customer $26,969,181 $27,969,181 $28,969,181 $29,719,181 $30,719,181 Proposed D&C Rate Increase $250,000 $500,000 $750,000 $1,000,000 $1,250,000 Commodity $26,930,076 $28,248,820 $28,305,205 $29,794,783 $30,926,134 Proposed Commodity Increase $750,000 $900,000 $750,000 $1,000,000 $1,000,000 CIC Revenue $11,217,962 $10,610,410 $11,209,245 $12,554,613 $14,519,241 Proposed CIC Rate Increase $0 $500,000 $500,000 $750,000 $750,000 Fire Protection Surcharge $433,649 $433,649 $433,649 $433,649 $433,649 Fire Protection Service $1,025,000 $1,025,000 $1,025,000 $1,025,000 $1,025,000 Service Connection Fees $137,500 $137,500 $137,500 $137,500 $137,500 Water Leases/Sales to Other
$1,011,500 $1,011,500 $1,011,500 $1,011,500 $1,011,500
Utilities
Total Operating Revenues $68,724,868 $71,336,060 $73,091,280 $77,426,226 $81,772,205 Operating Expenses:
Purchased Water $21,996,195 $21,615,268 $21,215,294 $22,063,906 $22,725,823 Purchased Power $2,976,098 $2,940,444 $2,906,009 $2,920,539 $2,935,141 Direct Operating Expenses $14,242,800 $14,670,084 $15,110,187 $15,563,492 $16,030,397 General & Administrative
$14,697,534 $15,138,460 $15,592,614 $16,060,393 $16,542,204 Expenses
Interest Expense $3,150,930 $3,758,250 $4,228,186 $4,068,681 $3,904,938 Depreciation and Amortization $8,730,640 $8,905,253 $9,083,358 $9,265,025 $9,450,326 Total Operating Expenses $65,794,197 $67,027,758 $68,135,647 $69,942,035 $71,588,829 Operating Income $2,930,670 $4,308,302 $4,955,633 $7,484,191 $10,183,377 Non-Operating Revenue $4,330,465 $4,542,458 $2,054,217 $2,057,146 $2,057,146 Income Before Fund Reimb. $7,009,850 $12,240,522
$7,261,135 $8,850,760 $9,541,337
from Water Svcs.
Reimbursement to General Fund $1,894,138 $1,894,138 $1,894,138 $1,894,138 $1,894,138 Net Income $5,366,997 $6,956,622 $5,115,712 $7,647,199 $10,346,384
REVENUE REQUIREMENT REVIEW
The five-year financial plan illustrates PWP's operations and maintenance ("O&M") costs.
Additionally, PWP includes its capital costs when calculating its total revenue requirements. Based on the current rates and forecasted sales, the projected revenues are expected to be insufficient to recover the utility's revenue requirements. Without rate actions, the imbalance will continually grow as costs rise. In order to mitigate the rate insufficiencies, staff developed a two-year rate proposal.
COST ALLOCATIONS OF REVENUE REQUIREMENTS
The FY 2022 planned O&M expenses are $67.7 million (comprised of operating expenses of $65.8 million and reimbursement to the General Fund of $1.9 million). PWP allocated these costs to the various customer classes in accordance with the 2019 Water Cost of Service Study ("WCOS"). The WCOS functionalized FY 2022 costs by PWP's cost categories. The FY 2022 WCOS categorization results are shown in Table 2.
Table 2: 0&M Cost Summary (S millions)
Cost Type Amount
Commodity $31.0
D&C* $33.8
CIC (scheduled interest expense in FY 2022)** $2.9
Total FY 2022 O&M Costs $67.7
* Includes interest expense for capital projects not funded by the CIC (approximately $0.25 million) ** Excludes cash funding for capital expenditures and principal debt service payment In addition to the O&M review, staff identified capital revenue requirements and determined that PWP should recover $4.1 million for unfunded capital projects not included in the CIC calculation and $5.5 million in unfunded CIC projects. The unfunded CIC projects comprise 35% of the amount not collected by the CIC rate. The depreciation cost of $9 million is excluded in order to capture the cash basis revenue requirement. The $8.5 million capital revenue requirement is funded by the CIC formula. The CIC formula applies a 35% funding target of the five-year average capital spend. Table 3 summarizes these O&M and Capital cost allocations of revenue requirements.
Table 3: FY 2022 Revenue Requirement ($ millions)
FY 2022 Revenue Requirement Commodity D&C CIC Total
Operations and Maintenance Total $31.0 $33.8 $2.9 $67.7 Capital Revenue Requirement
Unfunded capital projects* 4.1 4.1
:
Unfunded CIC projects 5.5 5.5
Cash funding from CIC calculation 8.5 8.5
Debt Service from CIC calculation** 4.2 4.2
Less Depreciation -9.0 -9.0
Capital Revenue Requirement Total $0 $0.6 $12.7 $13.3
Total FY 2022 Revenue Requirements $31.0 $34.4 $15.6 $81.0 * Includes principal payment for capital projects not funded by the CIC ** Includes debt service from CIC calculation
PROPOSED WATER RATE ADJUSTMENTS
Based on the current rates and forecasted sales, the utility is projected to be short of recovering its revenue requirements. In order to mitigate the rate insufficiencies, staff proposes revenue increases of $1.0 million in FY 2022 and $1.9 million in FY 2023. It is important to note, that the proposed revenue increases are not intended to fully recover the annual revenue requirements. The shortfalls are offset by available water fund reserves and the use of bond funds when appropriate. The proposed increases are designed to contribute to the revenue recovery over a multi-year period.
The D&C rates were updated based on forecasted number of customers by meter size.
The allocation of proposed D&C rate increases by meter size applies the hydraulic capacity/equivalent meters methodology. The proposed changes to the D&C rate are shown in Table 4.
Table 4: Distribution and Customer Charge: Current and Proposed (excludes FPS) Meter Size Current April 1, 2022 January 1, 2023
5/8"-3/4" $24.28 $25.18 $26.08
$46.13 $47.84 $49.55
11/2" $94.69 $98.20 $101.71
2" $218.54 $226.64 $234.75
3" $534.18 $553.99 $573.79
4" $820.64 $851.07 $881.50
6" $1,267.37 $1,314.37 $1,361.36
$2,061.45 $2,137.88 $2,214.32
10* $2,683.01 $2,782.49 $2,881.97
Proposed adjustments to the Commodity Rate are shown in Table 5.
Table 5: Commodity Rates: Current and Proposed
Per Billing Unit Current April 1, 2022 January 1, 2023
Block 1 $1.44852 $1.63649 $1.76849
Block 2 $3.07637 $3.47558 $3.74827
Block 3 $3.60615 $4.07410 $4.39376
Block 4 $4.37569 $4.94350 $5.33137
Proposed adjustments to the CIC are shown in Table 6.
Table 6: Capital Improvement Charge: Current and Proposed Current April 1, 2022 January 1, 2023
Per Billing Unit
$1.00501 $1.00501 $1.12404