CITY OF TORRANCE
Water Rate and
Cost of Service Study
DRAFT REPORT / OCTOBER 29, 202 4
ATTACHMENT 6
227 W. Trade Street, Suite 1400, Charlotte, NC 28202
www.raftelis.com
October 29, 2024
Mr. Chuck Schaich
Senior Analyst
City of Torrance
3031 Torrance Blvd
Torrance, CA 90503
Subject: Water Cost of Service Study Report
Dear Mr. Schaich:
Raftelis Financial Consultants, Inc. (Raftelis) is pleased to present this report on the water cost of service study to the City of Torrance (City). The Study involved a comprehensive review of the City’s financial plan and rate structure. We are confident that the analysis, based on a cost of service principles, results in fair and equitable water rates for the City’s customers and meets the requirements of Proposition 218.
The report includes an Executive Summary followed by the financial plan and a detailed rate derivation for the water utility.
It was a pleasure working with you and we wish to express our thanks to you and Mr. Andy Darlak for support during the study. If you have any questions, please call me on (626) 827 8931.
Sincerely,
RAFTELIS FINANCIAL CONSULTANTS, INC.
Sudhir D. Pardiwala, PE Lindsay Roth
Executive Vice President Consultant
City of Torrance / Water Cost of Service and Rate Study
Contents
1. Executive Summary ..................................................................... 1
1.1. System Background .....................................................................................................1
1.2. Financial Plan ................................................................................................................2
1.3. Cost-of-Service Analysis and Rate Design .................................................................4
1.4. Proposed Water Rates ..................................................................................................5
1.5. Customer Impacts .........................................................................................................6
2. Overview ....................................................................................... 7
2.1. Introduction ...................................................................................................................7
3. Water Rates .................................................................................. 9
3.1. System Background .....................................................................................................9
3.2. Account and Usage Assumptions ...............................................................................9
3.2.1. Water Use ................................ ................................ ................................ ..................... 10
3.3. Inflationary and Other Assumptions ......................................................................... 11
3.4. Financial Plan .............................................................................................................. 12
3.4.1. Revenue Requirement ................................ ................................ ................................ .. 12
3.5. Cost-Based Rate Setting Methodology ..................................................................... 20
3.5.1. Calculate Revenue Requirement ................................ ................................ ................... 20
3.5.2. Cost of Service Analysis (COS) ................................ ................................ ..................... 20
3.5.3. Rate Design and Calculations ................................ ................................ ....................... 21
3.5.4. Rate Adoption ................................ ................................ ................................ ............... 21
3.6. Cost-of-Service Analysis ............................................................................................ 21
3.6.1. Allocation of Functionalized Expenses to Cost Components ................................ ......... 22
3.6.2. Revenue Requirement Determination ................................ ................................ ........... 29
3.6.3. Unit Cost Component Derivation ................................ ................................ ................... 30
3.7. Rate Derivation ............................................................................................................ 35
3.7.1. Existing Rate Structure and Rates ................................ ................................ ................. 35
3.7.2. Proposed Monthly Fixed Charges ................................ ................................ ................. 36
3.7.3. Proposed Commodity Rates ................................ ................................ .......................... 38
3.8. Summary of Cost of Service ...................................................................................... 43
3.9. Bill Impacts .................................................................................................................. 45 City of Torrance / Water Cost of Service and Rate Study
3.10. Monthly Bill Comparison ............................................................................................ 46
City of Torrance / Water Cost of Service and Rate Study
Tables
Table 1-1: Annual Revenue Increases ................................ ................................ ................................ ..... 4 Table 1-2: Proposed Monthly Service Charges ................................ ................................ ........................ 5 Table 1-3: Proposed Monthly Pumping Charges ................................ ................................ ...................... 5 Table 1-4: Proposed Monthly Private Fire Charges ................................ ................................ .................. 6 Table 1-5: Proposed Commodity Rates ................................ ................................ ................................ ... 6 Table 1-6: SFR Water Monthly Rate Impacts ................................ ................................ ........................... 6 Table 3-1: Projected Potable Water Accounts by Meter Size ................................ ................................ . 10 Table 3-2: Projected Water Use by Customer Class ................................ ................................ .............. 11 Table 3-3: Inflationary Assumptions ................................ ................................ ................................ ....... 12 Table 3-4: Projected Water O&M Expenses ................................ ................................ ........................... 13 Table 3-5: Detailed Capital Improvement Plan – Inflated ................................ ................................ ........ 13 Table 3-6: Debt Service Payments ................................ ................................ ................................ ......... 14 Table 3-7: Proposed Rate Adjustments ................................ ................................ ................................ .. 14 Table 3-8: Five-Year Water Cash Flow ................................ ................................ ................................ .. 15 Table 3-9: Projected Fund Balance ................................ ................................ ................................ ........ 20 Table 3-10: System-Wide Peaking Factors and Allocation to Cost Components ................................ .... 23 Table 3-11: Peaking Factors by Customer Class ................................ ................................ ................... 24 Table 3-12: Equivalent Meters ................................ ................................ ................................ ............... 25 Table 3-13: Allocation of Functionalized O&M and Capital Expenses to Cost Causation Components .. 27 Table 3-14: Revenue Offset Allocation ................................ ................................ ................................ ... 28 Table 3-15: Revenue Requirement Determination ................................ ................................ ................. 30 Table 3-16: Service Units by Class ................................ ................................ ................................ ........ 31 Table 3-17 Revenue Requirement Allocation ................................ ................................ ......................... 32 Table 3-18: Cost Component Allocation ................................ ................................ ................................ . 32 Table 3-19: Unit Cost Derivation ................................ ................................ ................................ ............ 33 Table 3-20: Allocation of Cost to Customer Class ................................ ................................ .................. 34 Table 3-21: Existing Monthly Service Charges ................................ ................................ ....................... 35 Table 3-22: Existing Monthly Pumping Charges ................................ ................................ ..................... 35 Table 3-23: Existing Monthly Private Fire Charges ................................ ................................ ................. 36 Table 3-24: Existing Commodity Rates ................................ ................................ ................................ .. 36 Table 3-25: Derivation of the Monthly RTS Charge ................................ ................................ ................ 37 Table 3-26: Derivation of the Monthly Pumping Service Charge ................................ ............................ 38 Table 3-27: Derivation of the Monthly Fire Service Charge ................................ ................................ .... 38 Table 3-28: Allocation of Water Supply ................................ ................................ ................................ .. 39 City of Torrance / Water Cost of Service and Rate Study
Table 3-29: Peaking Cost Calculation ................................ ................................ ................................ .... 40 Table 3-30: Proposed Commodity Rates ................................ ................................ ............................... 41 Table 3-31: Proposed Monthly Service Charges ................................ ................................ .................... 42 Table 3-32: Proposed Monthly Pumping Charges ................................ ................................ .................. 42 Table 3-33: Proposed Monthly Private Fire Charges ................................ ................................ .............. 42 Table 3-34: Proposed Commodity Rates ................................ ................................ ............................... 43 Table 3-35: SFR Monthly Rate Impacts ................................ ................................ ................................ . 45 Table 3-36: All Other Standard Customer Monthly Rate Impacts ................................ ........................... 45 Table 3-37: Low Income Senior & Disabled Customer Monthly Rate Impacts ................................ ........ 45
Figures
Figure 1-1: Projected Financial Plan ................................ ................................ ................................ ........ 3 Figure 1-2: Capital Financing Plan (numbers rounded) ................................ ................................ ............ 3 Figure 1-3: Projected Reserves ................................ ................................ ................................ ................ 4 Figure 2-1: Map of Torrance Municipal Water Service Area ................................ ................................ ..... 8 Figure 3-1: FY 2025 Revenue Adjustment Breakdown ................................ ................................ ........... 16 Figure 3-2: Proposed Revenue Adjustments and Debt Coverage Ratio ................................ ................. 17 Figure 3-3: Proposed Financial Plan ................................ ................................ ................................ ...... 17 Figure 3-4: Projected CIP and Funding Sources ................................ ................................ .................... 18 Figure 3-5: Total Fund Balance ................................ ................................ ................................ .............. 19 Figure 3-6: Monthly Bill Comparison ................................ ................................ ................................ ...... 46
Appendices
Appendix: Other Treatment Surcharge Rate Design
City of Torrance / Water Cost of Service and Rate Study
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1. Executive Summary
The City of Torrance (City) engaged Raftelis Financial Consultants, Inc. (Raftelis) to conduct a comprehensive financial plan and develop cost-of-service water rates for implementation starting January 2025 for five years. This report documents the resultant findings, analyses, and proposed changes that were developed with input from and approved by City staff.
The major objectives of the study include the following:
1. Ensure Revenue Sufficiency to meet the operation and maintenance (O&M) and capital needs of the City’s water utility.
2. Address the water supply cost increases and reduction in water use in the municipal service area.
3. Ensure that rates are Fair and Equitable and are based on Cost-of-Service guidelines used in the industry.
4. Plan for Rate and Revenue Stability to prevent rate spikes and provide for adequate operating and capital reserves and the overall financial health of the water utility under varying conditions.
This executive summary provides an overview of the study and includes findings and recommendations for water rates.
The remainder of the report defines a unit of water as a hundred cubic feet (abbreviated as HCF, hcf, or CCF). A hundred cubic feet of water equals 748 gallons. In addition, a fiscal year for the City is from July 1 to June 30 the following year. Therefore, July 1, 2024, through June 30, 2025, is identified as FY 2025; July 1, 2025, through June 30, 2026, is identified as FY 2026 and so on.
1.1. System Background
The water utility provides service to over 26,800 customer accounts covering 78 percent of the City.
The City is responsible for local water supply, the monitoring and maintenance of water quality, preventive and predicative maintenance, the operation and repair of the water system facilities and the distribution system, water resource and planning and development, coordination with other outside agencies, and interfacing with the State Water Resources Control Board (SWRCB) Division of Drinking Water and other agencies regarding water quality matters.
The water system consists of approximately 320 miles of transmission and distribution pipelines, 2,700 fire hydrants, and 7,500 valves. Potable water (drinking water) is supplied through three main sources: local groundwater derived from fresh groundwater wells, water produced from the Goldsworthy Desalter (Desalter) Project, and imported water purchased from Metropolitan Water District of Southern California (MWD). The City also purchases recycled water from the West Basin Municipal Water District (WBMWD) for non-potable uses including process water for the Torrance Refining Company (formerly Exxon-Mobil) and landscape irrigation purposes. The cost of water supply has increased in the last several years due to continued years of drought, tightening of water City of Torrance / Water Cost of Service and Rate Study
Water Cost of Service Study Report | 14
supplies, the higher cost of developing alternative supplies, the financial impacts on MWD due lower sales of imported water supplies, two wet winters, and environmental and regulatory requirements.
1.2. Financial Plan
To determine the revenue adjustments needed to meet the ongoing expenses of the City and provide fiscal stability, Raftelis projected the revenue requirements, including O&M expenses, capital improvement expenses, debt service costs, reserve requirements, etc., for the five-year study period from FY 2025 to 2029. O&M expenses include the cost of operating and maintaining water supply, treatment, storage, and distribution facilities, as well as the costs of providing technical services such as engineering services and other administrative costs of the water system such as meter reading and billing. O&M projections for FY 2026 and beyond are based on the City’s FY 2025 budget using various inflationary factors detailed in Section 3.3. Existing annual debt service payments range from $1.0 to $1.6 million over the planning period.
Figure 1-1 shows the projected financial plan for the City. The light blue bar represents the water supply cost (groundwater pumping, desalter water, and purchased water from MWD), the dark green bars represent other O&M expenses, the red bars represent the City’s existing debt service, and the yellow bars represent rate and reserve funded capital project costs. The green bars, if shown, represent the revenues that the City puts aside in reserves after meeting the revenue requirements.
The solid dark line represents the projected revenue at current rates; the dotted dark line represents the projected revenue with the proposed revenue adjustments. The figure clearly shows that the water enterprise would not be able to fund its expenses without revenue adjustments.
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Figure 1-1: Projected Financial Plan
In addition to the operating expenses, the City is planning significant capital expenditures over the next five years (FY 2025 to 2029), totaling approximately $25.3 million. The City plans to fund all of its projected CIP through rate revenue and reserves. Figure 1-2 shows the water CIP funding plan over the planning period.
Figure 1-2: Capital Financing Plan (numbers rounded)
To ensure that the City will have adequate revenues to fund water operating and capital expenses and to maintain sufficient reserves, Raftelis recommends the revenue adjustments in Table 1-1.
These increases are needed to finance the operating and capital inflated expenses. The primary
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reason for these rate increases is the reduced revenues from lower water sales, capital improvements costs along with the large increases in the cost of water.
Table 1-1: Annual Revenue Increases
Revenue Adjustments FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 Effective January January January January January
Percent Adjustment 6.5% 6.5% 6.0% 6.0% 6.0%
Figure 1-3 shows the resulting reserves balance for the water utility. The dark line represents the total target, which is composed of operating, capital, and emergency reserves targets consistent with industry standards. The operating reserve target is set at 25 percent of the operating expenses to allow for unanticipated operating expenses, the capital reserve is set to one year of average annual CIP to cover capital expenditure needs, and the emergency reserve target is set at $500k, consistent with the City’s policy. To reduce the impact on customers, the reserves targets will be gradually drawn down over the next five years to fund capital.
Figure 1-3: Projected Reserves
1.3. Cost-of-Service Analysis and Rate Design
To calculate fair and equitable rates so that users pay in proportion to the cost of providing service, Raftelis performed a cost allocation of the total revenue requirements consistent with industry standards. The cost-of-service allocation is based on the Base-Extra Capacity Method described in the American Water Works Association (AWWA) Manual M1. Under this method, costs are apportioned amongst various cost parameters to determine the costs to provide service under average conditions, meet peaking requirements, provide meter capacity and provide customer
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service. Costs to serve different customer classes are determined; rates are then designed to recover the costs equitably based on the demands of customers.
1.4. Proposed Water Rates
Raftelis recommends that the City retains its current rate structure. The existing tiers are: Tier 1 is set at 0 to 7 hcf per month, which represents the estimated indoor water usage; Tier 2 is set at 8 to 12 hcf per month, which represents the average estimated outdoor and other water usage; Tier 3 is any usage above Tier 2. The tiers for all other standard customers are 0 to 10 hcf per month in the first tier. Table 1-2 through Table 1-5 show the proposed rates for the next five years. These rates are effective January 1, 2025, and in January of each subsequent year.
Table 1-2: Proposed Monthly Service Charges
Meter Size Current
CY 2024
Proposed
CY 2025
Proposed
CY 2026
Proposed
CY 2027
Proposed
CY 2028
Proposed
CY 2029
3/4" $7.48 $7.48 $7.97 $8.45 $8.96 $9.50
1" $10.74 $10.57 $11.26 $11.94 $12.66 $13.42
1 1/2" $18.89 $18.29 $19.48 $20.65 $21.89 $23.21
2" $28.68 $27.55 $29.35 $31.12 $32.99 $34.97
3" $59.64 $56.88 $60.58 $64.22 $68.08 $72.17
4" $105.30 $100.09 $106.60 $113.00 $119.78 $126.97
6" $214.49 $203.51 $216.74 $229.75 $243.54 $258.16
8" $393.83 $373.30 $397.57 $421.43 $446.72 $473.53
10" $622.03 $589.39 $627.71 $665.38 $705.31 $747.63
Table 1-3: Proposed Monthly Pumping Charges
Meter
Size
Current
CY2024
Proposed
CY 2025
Proposed
CY 2026
Proposed
CY 2027
Proposed
CY 2028
Proposed
CY 2029
3/4" $6.40 $8.35 $8.90 $9.44 $10.01 $10.62
1" $10.66 $13.91 $14.82 $15.71 $16.66 $17.66
1 1/2" $21.29 $27.82 $29.63 $31.41 $33.30 $35.30
2" $34.08 $44.51 $47.41 $50.26 $53.28 $56.48
3" $75.54 $97.37 $103.70 $109.93 $116.53 $123.53
4" $134.17 $175.26 $186.66 $197.86 $209.74 $222.33
6" $276.84 $361.64 $385.15 $408.26 $432.76 $458.73
8" $511.10 $667.64 $711.04 $753.71 $798.94 $846.88
10" $809.22 $1,057.10 $1,125.82 $1,193.37 $1,264.98 $1,340.88
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Table 1-4: Proposed Monthly Private Fire Charges
Line Size Current
CY2024
Proposed
CY 2025
Proposed
CY 2026
Proposed
CY 2027
Proposed
CY 2028
Proposed
CY 2029
2" $6.43 $7.77 $8.28 $8.78 $9.31 $9.87
3" $13.71 $17.15 $18.27 $19.37 $20.54 $21.78
4" $26.29 $33.32 $35.49 $37.62 $39.88 $42.28
6" $71.40 $91.36 $97.30 $103.14 $109.33 $115.89
8" $149.24 $191.46 $203.91 $216.15 $229.12 $242.87
10" $266.32 $342.03 $364.27 $386.13 $409.30 $433.86
12" $428.60 $550.72 $586.52 $621.72 $659.03 $698.58
Table 1-5: Proposed Commodity Rates
Customer
Class
Monthly
Tiers
(hcf)
Current
CY2024
Proposed
CY 2025
Proposed
CY 2026
Proposed
CY 2027
Proposed
CY 2028
Proposed
CY 2029
Single Family
Tier 1 0-7 $3.42 $3.55 $3.79 $4.02 $4.27 $4.53
Tier 2 8-12 $5.77 $5.47 $5.83 $6.18 $6.56 $6.96
Tier 3 13+ $6.98 $7.46 $7.95 $8.43 $8.94 $9.48
All Other Standard Customers
Tier 1 0-10 $3.89 $4.09 $4.36 $4.63 $4.91 $5.21
Tier 2 11+ $5.55 $6.04 $6.44 $6.83 $7.24 $7.68
Low Income Senior & Disabled
Tier 1 0-7 $2.93 $2.78 $2.97 $3.15 $3.34 $3.55
Tier 2 8-12 $5.29 $5.06 $5.39 $5.72 $6.07 $6.44
Tier 3 13+ $3.42 $5.82 $6.20 $6.58 $6.98 $7.40
1.5. Customer Impacts
Table 1-6 below shows the impacts of an average SFR customer with a ¾ inch meter using various levels of monthly water usage, assuming no pumping service charge. Due to rounding in the calculations, some values may not add to the penny.
Table 1-6: SFR Water Monthly Rate Impacts
Single Family Monthly Bill Impacts,
3/4" meter
Usage
(ccf)
Current
Monthly
Bill
Proposed
Monthly
Bill
Difference
($)
Difference
(%)
Low Use 4 $21.14 $21.68 $0.54 2.6%
Below Average Use 7 $31.39 $32.33 $0.94 3.0%
Typical Use 11 $54.45 $54.21 -$0.24 -0.4%
High Use 17 $95.13 $96.98 $1.85 1.9%
Very High Use 25 $150.99 $156.66 $5.67 3.8%
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2. Overview
2.1. Introduction
In 2024, the City engaged Raftelis to conduct a cost-of-service rate study for the water utility to meet regulatory requirements and ensure that there is a recovery of costs proportionate to the service provided to its customers. This report documents the resultant findings, analyses, and proposed changes. The subject Water Rate and Cost of Service Study addresses rates in the Torrance Municipal Water (TMW) service area, as shown on Figure 2-1.
The major objectives of the study include the following:
1. Ensure Revenue Sufficiency to meet the operation and maintenance (O&M) and capital needs of the City’s water utility.
2. Address the water supply cost increases and reduction in water use in the municipal service area.
3. Ensure that rates are Fair and Equitable and are based on Cost-of-Service guidelines used in the industry.
4. Plan for Rate and Revenue Stability to prevent rate spikes and provide for adequate operating and capital reserves and the overall financial health of the water utility under varying conditions.
This Report provides an overview of the study and includes findings and recommendations for water rates.
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Figure 2-1: Map of Torrance Municipal Water Service Area
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3. Water Rates
This section describes the long-range financial plan for the water utility, the findings and results of the cost-of-service water rate study, and a detailed discussion of the proposed water rates and the customer impacts resulting from the proposed rates. It also includes a description of the water system, the water cost of service methodology, the determination of annual revenues required from rates, and a detailed discussion on the Cost of Service, which includes allocation of costs to water cost causation parameters and the determination of unit costs.
3.1. System Background
The water utility provides service to approximately 26,800 customer accounts covering 78 percent of the City. The City is responsible for local water supply, the monitoring and maintenance of water quality, preventive and predicative maintenance, the operation and repair of the water system facilities and the distribution system, water resource planning and development, long range financial planning and water rate assessment, coordination with outside agencies and interfacing with regulatory bodies including the State Water Resources Control Board’s Division of Drinking Water and other agencies regarding water quality matters.
The water system consists of approximately 320 miles of transmission and distribution pipelines, 2,700 fire hydrants and 7,500 valves. Potable water (drinking water) is supplied through three main sources: local groundwater produced from freshwater wells; water produced from the Goldsworthy Desalter and imported water supplies purchased from the Metropolitan Water District of Southern California. The City also purchases recycled water from the West Basin Municipal Water District for non-potable uses including process water for the Torrance Refining Company (formerly ExxonMobil) and for landscape irrigation of various sites throughout the city. The cost of water supply has increased in the last several years due to continued years of drought, tightening water supplies, environmental and regulatory requirements, and in the last two years due to wet winters.
3.2. Account and Usage Assumptions
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Table 3-1 shows the estimated number of potable water accounts by meter size for FY 2025 through FY 2029. Raftelis estimated the number of accounts by tabulating FY 2024 (actual) account data provided by the City. All customers are projected to have no growth in the planning period. The number of accounts is used to forecast the amount of fixed revenue the City will receive from the meter service charge.
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Table 3-1: Projected Potable Water Accounts by Meter Size Projected Accounts
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
3/4" 21,284 21,284 21,284 21,284 21,284 21,284
1" 2,900 2,900 2,900 2,900 2,900 2,900
1 1/2" 1,059 1,059 1,059 1,059 1,059 1,059
2" 718 718 718 718 718 718
3" 144 144 144 144 144 144
4" 69 69 69 69 69 69
6" 26 26 26 26 26 26
8" 31 31 31 31 31 31
10" 12 12 12 12 12 12
12" 0 0 0 0 0 0
14" 0 0 0 0 0 0
Total 26,243 26,243 26,243 26,243 26,243 26,243
The revenue calculated for each of the fiscal years in the Financial Plan is a function of the number of accounts, account growth, demand growth, water use, and existing rates. The rate study is designed to determine water rates for the next five years; thus, the water usage projections are based on a “new normal” assumption based on the demand in FY 2024. A nominal annual increase in demand of 0.2% is expected due to the low demand from wet winter in 2024.
3.2.1. Water Use
Table 3-2 shows the projected water use for FY 2024 through FY 2029 by customer class. The projections include no account growth and the small change in demand for residential, standard and contract customers and for the study period.
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Table 3-2: Projected Water Use by Customer Class
Projected Water Usage (hcf) FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 Single Family
Tier 1 1,377,922 1,380,678 1,383,439 1,386,206 1,388,979 1,391,757 Tier 2 445,240 446,130 447,023 447,917 448,812 449,710 Tier 3 299,871 300,471 301,072 301,674 302,277 302,882
All Other Standard Customers
Tier 1 451,309 452,211 453,116 454,022 454,930 455,840
Tier 2 2,631,498 2,636,761 2,642,035 2,647,319 2,652,613 2,657,919
Low Income Senior & Disabled
Tier 1 18,223 18,260 18,296 18,333 18,370 18,406
Tier 2 4,432 4,441 4,450 4,459 4,468 4,477
Tier 3 3,255 3,261 3,268 3,274 3,281 3,287
TRC Refinery 1,847,994 1,568,160 1,568,160 1,568,160 1,568,160 1,568,160
Contract Customers 304,920 305,530 306,141 306,753 307,367 307,981
Total Standard Potable 7,384,664 7,115,903 7,126,999 7,138,117 7,149,256 7,160,419
3.3. Inflationary and Other Assumptions
This section describes the assumptions used in projecting operating and capital expenses as well as reserve and debt coverage requirements that determine the overall revenue adjustments required to ensure the financial stability of the City. Revenue adjustments represent the average increase in rates for the City as a whole, however, rate changes for individual classes will depend on the cost of service.
To ensure that future costs are reasonably projected, it is necessary to make informed assumptions about inflationary factors and water costs and use. Table 3-3 shows the water purchases and other inflationary assumptions incorporated in the five-year Financial Plan. O&M projections are based on the City’s FY 2025 budget using annual inflationary factors starting in FY 2026 to project all O&M expenditures. One of the largest drivers of the financial plan is the cost of water supply.
Metropolitan Water District (MWD) rates are expected to increase 64% cumulatively over the next five years. Additionally, groundwater and desalter costs are projected to increase at 5% annually.
The combined increase in the cost of water supply puts extra financial pressure on the City to mitigate customer impacts.
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Table 3-3: Inflationary Assumptions
Escalation Factors FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 General 3% 3% 3% 3% 3%
Salary 3% 3% 3% 3% 3%
Benefits 5% 5% 5% 5% 5%
Utilities 3% 3% 3% 3% 3%
Capital 4% 4% 4% 4% 4%
MWD 7.5% 10.3% 11.4% 13% 9.6%
Groundwater 5% 5% 5% 5% 5%
Desalter 5% 5% 5% 5% 5%
Recycled 5% 5% 5% 5% 5%
3.4. Financial Plan
The assumptions shown above were incorporated into the five-year Financial Plan. To develop the financial plan, Raftelis projected annual expenses and revenues, modeled reserve balances, capital expenditures and calculated debt service coverage ratios to estimate the amount of additional rate revenue needed per year. This section of the report provides a discussion of O&M expenses, the Capital Improvement Plan (CIP), reserve funding, projected revenue under existing rates and the revenue adjustments needed to ensure the fiscal sustainability and solvency of the water enterprise.
3.4.1. Revenue Requirement
A utility’s yearly revenue requirement is the amount of yearly revenue needed to operate, maintain and ensure fiscal solvency of the City. The revenue requirement includes O&M expenses, rate funded capital expenditures, debt service payments and reserve requirements (funding for reserves) net of any miscellaneous revenue sources.
3.4.1.1. O&M Expenses
The City’s FY 2025 O&M budget and subsequent years projected O&M expenses are summarized in Table 3-4. The Financial Plan study period is from FY 2025 to 2029. The O&M budget incorporates the inflationary factors shown in Table 3-3. O&M expenses include the cost of purchased water, operating and maintaining groundwater wells, treatment, storage, and distribution facilities, as well as the costs of providing technical services such as engineering services and other administrative and operating costs of the water system such as meter reading and billing.
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Table 3-4: Projected Water O&M Expenses
O&M Summary FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Materials, Supplies, & Maintenance $2,607,323 $2,685,543 $2,766,109 $2,849,092 $2,934,565 Professional/Contract Services $2,237,164 $2,304,279 $2,373,407 $2,444,610 $2,517,948 Water Supply Costs $35,166,500 $35,581,247 $38,798,351 $41,728,861 $44,377,882 Interdepartmental Changes $2,981,294 $3,070,917 $3,163,234 $3,258,327 $3,356,278 Other Operating Transfers Out $406,903 $406,903 $406,903 $406,903 $406,903 Salaries and Employee Benefits $5,949,210 $6,185,278 $6,431,308 $6,687,742 $6,955,044 Training, Travel & Membership
Dues $52,453 $54,027 $55,647 $57,317 $59,036
Bad Debts and Other Losses $150,000 $154,500 $159,135 $163,909 $168,826 Liabilities, Settlements & Insurance $16,008 $16,008 $16,008 $16,008 $16,008 Total O&M $49,566,855 $50,458,701 $54,170,102 $57,612,768 $60,792,491
3.4.1.2. Capital Improvement Plan
Table 3-5 shows the City’s five-year CIP, which total approximately $25.3 million. The projects will be funded on a pay -as –you-go basis (pay-go) from revenues derived through rates.
Table 3-5: Detailed Capital Improvement Plan – Inflated Capital Improvement Plan FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 I 145 Van Ness Ave Water Wells & Transmission Main – Phase 2- Wells and Site Rehabilitation(b) $1,000,000 $1,000,000 $2,000,000 $2,000,000 $3,800,000 I 153 (Miscellaneous Water Main Replacements including Planned Replacement Projects, and Developer and Street Rehab Projects – (c) $0 $0 $200,000 $2,800,000 $200,000 I 184 On-Site Recycled Water Retrofits $0 $0 $100,000 $100,000 $100,000 I 186 (High Pressure Zone Modifications) Wateria & Calle Mayor( e ) $0 $1,000,000 $1,000,000 $1,000,000 $0 I108 North Torrance Well Field (NTWP) Blower Scrubber System (f) $1,200,000 $0 $0 $0 $0 Automated Meter Integration (AMI) Upgrade -Unfunded Portion (g) $0 $0 $0 $0 $0 Water System Master Plan $500,000 $0 $0 $0 $0
Vista Montana Slope Rehabilitation (h) $1,200,000 $0 $0 $0 $0 Non-designated capital improvements $0 $0 $2,500,000 $2,500,000 $584,929 Improvements for Van Ness Avenue Well Field Project $520,000 Total Project Costs $3,900,000 $2,520,000 $5,800,000 $8,400,000 $4,684,929
3.4.1.3. Debt Service
Table 3-6 shows the debt service payments for the next five years. Debt service payments range for the planning period range from $1.0 million to $1.6 million. The OPUS Bank Loan will be paid off in FY 2028.
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Table 3-6: Debt Service Payments
Existing Debt FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Water Debt Schedule (OPUS Bank)
Principal $594,529 $608,644 $623,092 $439,565 $0
Interest $49,986 $35,873 $21,424 $6,632 $0
SRF Loan - Van Ness Transmission Main
Total Payment $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000
Total $1,644,515 $1,644,517 $1,644,516 $1,446,197 $1,000,000
3.4.1.4. Proposed Financial Plan and Revenue Adjustments The proposed revenue adjustments help ensure adequate revenue to fund operating expenses, capital expenditures and compliance with bond covenants. The Financial Plan model assumes the revenue adjustment occurs on January 1, 2025, and on January 1 of each subsequent year. The proposed revenue adjustments would enable the City to execute the CIP shown in Table 3-5 and meet the reserve targets for at least the first four years, falling just below the target in the last year.
Table 3-7 shows the proposed revenue adjustments for the next five years. These increases are needed to finance the capital improvement projects, fund sharply increasing costs of water supply, and cover inflationary increases in expenses.
Table 3-7: Proposed Rate Adjustments
Revenue Adjustments FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 Effective January January January January January
Percent Adjustment 6.5% 6.5% 6.0% 6.0% 6.0%
Table 3-8 shows the cash flow detail over the next five years. The projected O&M expenses on this table do not include recycled water costs.
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Table 3-8: Five-Year Water Cash Flow
Financial Plan FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 Revenues
Water Sales and Service Charges $38,702,067 $38,753,813 $38,805,663 $38,857,616 $38,909,673 Revenue Adjustments % Adj.
FY 2025 6.5% $1,257,817 $2,518,998 $2,522,368 $2,525,745 $2,529,129 FY 2026 6.5% $1,259,499 $2,522,368 $2,525,745 $2,529,129 FY 2027 6.0% $1,315,512 $2,634,546 $2,638,076
FY 2028 6.0% $1,396,310 $2,796,360
FY 2029 6.0% $1,482,071
Other Revenue $2,098,284 $2,195,518 $2,368,735 $2,505,338 $2,611,493 Investment Earnings $542,788 $420,163 $407,444 $333,815 $280,752 Total - Revenues $42,600,956 $45,147,991 $47,942,090 $50,779,115 $53,776,684
O&M Expenses
Program 981105 - Water Supply $26,251,775 $26,203,450 $28,933,809 $31,352,700 $33,463,971 Program 981106 - Water Operations $8,565,002 $8,854,557 $9,155,035 $9,466,876 $9,790,538 Program 981107 - Water Resources $25,472 $26,236 $27,023 $27,834 $28,669 Program 981108 - Water
Administration $2,772,180 $2,861,653 $2,954,153 $3,049,789 $3,148,672 WRD Goldsworthy Desalter $991,831 $1,027,762 $1,065,077 $1,103,831 $1,144,085 Total - O&M Expenses $39,785,355 $40,188,126 $43,385,998 $46,289,459 $48,903,016
Net Revenue (excluding Debt) $2,815,601 $4,959,865 $4,556,092 $4,489,657 $4,873,667
Debt Service
Existing Debt Service $1,644,515 $1,644,517 $1,644,516 $1,446,197 $1,000,000 Proposed Debt Service $0 $0 $0 $0 $0
Total - Debt Service $1,644,515 $1,644,517 $1,644,516 $1,446,197 $1,000,000
Net Revenue (including Debt) $1,171,086 $3,315,348 $2,911,576 $3,043,460 $3,873,667
Capital Projects
Rate Funded CIP $3,900,000 $2,520,000 $5,800,000 $8,400,000 $4,684,929 Total - Capital Projects $3,900,000 $2,520,000 $5,800,000 $8,400,000 $4,684,929
Net Cash Flow -$2,728,914 $795,348 -$2,888,424 -$5,356,540 -$811,262
Debt Coverage
Calculated 2.0 3.3 3.0 3.4 5.3
Required 1.1 1.1 1.1 1.1 1.1
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Figure 3-1 shows an approximation of the costs that make up the FY 2025 revenue adjustment. The costs include increased cost of water supply, increased cost of O&M and rate-funded CIP.
Figure 3-1: FY 2025 Revenue Adjustment Breakdown
Figure 3-2 through Figure 3-5 display the FY 2025 through FY 2029 Financial Plan in graphical format. Figure 3-2 shows calculated and required debt coverage requirements as shown by the solid light blue and dotted dark lines, respectively. The debt coverage ratio is calculated by dividing net operating revenue (revenues minus O&M expenses) by the annual debt service for each year. The City’s calculated debt coverage is well above required levels for all years of the financial plan period.
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Figure 3-2: Proposed Revenue Adjustments and Debt Coverage Ratio
Figure 3-3 graphically illustrates the Financial Plan – it compares existing and proposed revenues with projected expenses. The expenses include water supply, O&M, debt service, capital costs, and net income are shown by the stacked bars; and total revenues at existing and proposed rates are shown by the horizontal solid and dotted lines, respectively. Current revenue from existing rates does not meet future total expenses and clearly shows the need for revenue adjustments.
Figure 3-3: Proposed Financial Plan
Figure 3-4 summarizes the projected CIP and its funding sources – debt and/or rate/reserve. As shown, the City will fund all its replacement and modernization of infrastructure capital projects
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through rates and/or reserves, as shown by the blue bars. There are no debt funded or unfunded projects.
Figure 3-4: Projected CIP and Funding Sources
Figure 3-5 displays the resulting fund balance for the water utility. The line represents the total target, which is composed of operating, capital, and emergency reserves targets consistent with the City’s policy. The operating reserve target is set at 25 percent of the operating expenses to provide working capital and unanticipated operating expenses, the capital find is set at one year of average annual capital expenditures to fund capital projects, and the emergency reserve target is set at $500k to meet any emergency funds based on City policy. The reserves targets are met in each of the first four years and fall just a little below target in the final year.
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Figure 3-5: Total Fund Balance
Table 3-9 shows the projected fund balance and the reserves target for each of the proposed reserves in the water utility. This table corresponds with Figure 3-5. Transfers to Water Enterprise Vehicle Replacement are excluded from the Ending Balance in Figure 3-5 and is shown on the last line in Table 3-9 and is used to replace vehicles as necessary.
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Table 3-9: Projected Fund Balance
Financial Plan FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Beginning Balance $23,145,264 $20,820,567 $22,020,132 $19,535,925 $14,583,602
Sources of Funds
Water Sales and Service Charges $39,959,884 $42,532,310 $45,165,911 $47,939,962 $50,884,438 Other Revenues $2,098,284 $2,195,518 $2,368,735 $2,505,338 $2,611,493 Debt Proceeds $0 $0 $0 $0 $0
Investment Earnings $542,788 $420,163 $407,444 $333,815 $280,752 Total - Sources of Funds $42,600,956 $45,147,991 $47,942,090 $50,779,115 $53,776,684
Uses of Funds
O&M Expenses $39,785,355 $40,188,126 $43,385,998 $46,289,459 $48,903,016 Debt Service $1,644,515 $1,644,517 $1,644,516 $1,446,197 $1,000,000 Capital Projects $3,900,000 $2,520,000 $5,800,000 $8,400,000 $4,684,929 Total - Uses of Funds $45,329,870 $44,352,643 $50,830,514 $56,135,656 $54,587,946
Ending Balance $20,416,350 $21,615,915 $19,131,708 $14,179,385 $13,772,340 O&M Transfers $404,217 $404,217 $404,217 $404,217 $404,217 Ending Balance + Transfers $20,820,567 $22,020,132 $19,535,925 $14,583,602 $14,176,557
3.5. Cost-Based Rate Setting Methodology
As stated in the AWWA M1 Manual, “the costs of water rates and charges should be recovered from classes of customers in proportion to the cost of serving those customers.” To develop utility rates that comply with Proposition 218 and industry standards while meeting other emerging goals and objectives of the utility, there are four major steps discussed below.
3.5.1. Calculate Revenue Requirement
The rate-making process starts by determining the test year revenue requirement - which for this study is FY 2025. The revenue requirement should sufficiently fund the utility’s O&M, debt service, and capital expenditures, and reserve funding.
3.5.2. Cost of Service Analysis (COS)
The annual cost of providing water service is distributed among customer classes commensurate with their service requirements. A COS analysis involves the following:
1. Functionalizing costs. Examples of functions are supply, treatment, transmission, distribution, storage, meter servicing and customer service, billing and collection.
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2. Allocating functionalized costs to cost causation components. Cost causation components include supply, base delivery, maximum day, maximum hour1, meter service, customer servicing and conservation costs.
3. Distributing the cost causation components. Distribute cost causation components, using unit costs, to customer classes in proportion to their demands on the water system. This is described in the M1 Manual published by AWWA.
A COS analysis considers both the average quantity of water consumed (supply costs), the cost of delivering water under average conditions (base delivery), and the peak rate at which it is consumed (peaking or capacity costs as identified by maximum day and maximum hour demands).2 Peaking costs are costs that are incurred during peak times of consumption. The water system is designed to handle peak demands, and additional costs are associated with designing, constructing, and operating and maintaining facilities to meet peak demands. The peak demand costs need to be allocated to those imposing such costs on the utility. In other words, not all customer classes share the same responsibility for peaking related costs based on their peaking characteristics.
3.5.3. Rate Design and Calculations
Rates do more than simply recover costs. Within the legal framework and industry standards, properly designed rates should support and optimize a blend of various utility objectives, such as conservation, affordability for essential needs, and revenue stability, all supported by the cost of service. Rates may also function as a public information tool in communicating these objectives to customers.
3.5.4. Rate Adoption
Rate adoption is the last step of the rate-making process to comply with Proposition 218. Raftelis documented the rate study results in this Study Report to help educate the public about the proposed changes, the rationale and justifications behind the changes and their anticipated financial impacts in lay terms.
3.6. Cost-of-Service Analysis
The principles and methodology of a cost-of-service analysis were described in the preceding section.
A cost of service analysis distributes a utility’s revenue requirements (costs) to each customer class.
After determining a utility’s revenue requirements, the next step in a cost of service analysis is to functionalize its O&M costs, based on the City’s current O&M classification:
1 Collectively maximum day and maximum hour costs are known as peaking costs or capacity costs. 2 System capacity is the system’s ability to supply water to all delivery points at the time when demanded. It is measured by each customer class’s water demand at the time of greatest system demand. The time of greatest demand is known as peak demand. Both the operating costs and the capital asset related costs incurred to accommodate the peak flows are generally allocated to each customer class based upon the class’s contribution to the peak event.
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1. Water Supply – include the costs of purchasing and producing water
2. Water Operations – include operational costs to maintain the water system, as well as pumping, billing and meter maintenance costs
3. Water Resources – include the costs of the engineering department
4. Water Administration – include administrative cost of the water system
5. Financial Obligations – include the indirect costs charged by other departments
6. WRD Goldsworthy Desalter – include the costs of operating the Goldsworthy Desalter
The functionalization of costs allows us to better allocate the functionalized costs to the cost causation components. The cost causation components include:
1. Supply
2. Base Delivery (average) costs
3. Peaking costs (maximum day and maximum hour)
4. Fire protection
5. Pumping
6. Meter service
7. Billing and customer service
8. Revenue Offset
9. General and administrative costs
Peaking costs are further divided into maximum day and maximum hour demand. The maximum day (Max Day) demand is the maximum amount of water used in a single day in a year. The maximum hour (Max Hour) demand is the maximum usage in an hour on the maximum usage day.
Different facilities, such as distribution and storage facilities (and the O&M costs associated with those facilities), are designed to meet the peaking demands of customers. Therefore, extra capacity3 Costs include the O&M and capital costs associated with meeting peak customer demand. This method is consistent with the AWWA M1 Manual and is widely used in the water industry to perform cost-of-service analyses.
3.6.1. Allocation of Functionalized Expenses to Cost
Components
After functionalizing expenses, the next step is to allocate the functionalized expenses to cost causation components. To do so we must identify system wide peaking factors which are shown in Table 3-10. The system-wide peaking factors, provided by the City, are used to derive the cost component allocation bases (i.e., percentages) shown in Table 3-10. The Max Day factor is 1.78 which means that the maximum amount of water used on one day in a year is 1.78 times the average. The Max Hour factor is 2.67 which means that the maximum amount of water per hour used on the max day is 2.67 times the average. Functionalized expenses are then allocated to the cost components using these allocation bases. To understand the interpretation of the percentages, we must first establish the base use as the average daily demand during the year.
3 The terms extra capacity, peaking and capacity costs are used interchangeably.
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To determine the relative proportion of costs to assign to Base, Max Day and Max Hour, allocations are calculated based on these factors. Cost components that are solely Base related to provide average day demand (ADD), such as source of supply, are allocated 100 percent to Base. Cost components that are designed to meet Max Day peaks, such as reservoirs and transmission facilities, are allocated to Base and Max Day factors. Since facilities such as reservoirs and distribution systems are also designed to handle fire flow, an allocation is also provided for fire flow. The fire flow component is based on Insurance Services Office (ISO) standards; since the City has large industrial customers, the fire flow component is 15 percent of the design capacity of those facilities that require fire flow capacity. Normalizing Base Delivery to a factor of 1, the Max Day allocation is as follows:
Base Delivery: 49% = (1.00/1.78)x100 – 7.5% (half the fire allocation) Max Day: 36% = (1.78-1.00)/1.78x100 – 7.5% (half the fire allocation) Fire: 15%
Cost components such as those related to the distribution system that are designed for Max Hour peaks are allocated similarly. The allocation of Max Hour facilities is shown below:
Base Delivery: 32% = (1.00/2.67)x100 – 5% (1/3 fire allocation) Max Day: 24% = (1.78-1.00)/2.67x100 – 5% (1/3 fire allocation) Max Hour: 28% = (2.67-1.78)/2.67x100 – 5% (1/3 fire allocation) Fire: 15%
Collectively the maximum day and hour cost components are known as peaking costs. These allocation bases are used to assign the functionalized costs to the cost components.
Table 3-10: System-Wide Peaking Factors and Allocation to Cost Components System-Wide Peaking Factors
Peaking
Factor Base
Max
Day
Max
Hour Fire Total
Base 1.00 100% 0% 0% 0% 100%
Max Day 1.78 49% 36% 0% 15% 100%
Max Hour 2.67 32% 24% 28% 15% 100%
Average Max Day/Max Hour 41% 30% 14% 15% 100%
Table 3-11 shows derivation of the peaking factors by customer class and tier by dividing the total maximum bi-monthly usage by the average bi-monthly usage for each customer class and tier. These peaking factors are used to allocate the peaking costs to each customer class and tier. In the absence of daily data for the different customer classes and tiers, the bi-monthly peaks are used as a proxy for max day factors. It should be noted that the relative peaks for the different classes drive the cost allocation, and therefore, max month factors serve the purpose of allocating costs equitably.
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Table 3-11: Peaking Factors by Customer Class
Class-Specific Peaking Factors Tier Breaks Peaking
Single Family 1.26
Tier 1 0-7 1.09
Tier 2 8-12 1.32
Tier 3 13+ 1.76
All Other Standard Customers 1.21
Tier 1 0-10 1.07
Tier 2 11+ 1.24
Low Income Senior & Disabled 1.29
Tier 1 0-7 1.16
Tier 2 8-12 1.5
Tier 3 13+ 1.64
To allocate meter-related costs appropriately, the concept of equivalent meters needs to be understood. By using equivalent meters instead of a straight meter count, the analysis accounts for the fact that larger meters impose larger demands and are more expensive to install, maintain, and replace than smaller meters and commit a greater capacity in the system. Equivalent meters are used in calculating meter service costs.
Equivalent meters are based on meter hydraulic capacity. A ratio of hydraulic capacity is calculated by dividing large meter capacities by the base meter capacity. The base meter is the smallest meter, in our case, a 3/4-inch meter. The actual number of meters by size is multiplied by the corresponding capacity ratio to calculate equivalent meters. The capacity ratio is calculated using the meter capacity in gallons per minute (gpm) provided in the AWWA M22 Manual.
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Table 3-12 shows the equivalent meters for FY 2025 for regular meters, high pressure meters, and private firelines, respectively. Fireline capacities are based on Hazen Williams capacity ratios of diameter raised to the power 2.63. Hydrants have a 4” outlet to meet fire demands. The 2.5” outlets are used for maintenance and construction meters.
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Table 3-12: Equivalent Meters
Number of Meters Number of Equivalent Meters
Meter
Size
Capacity
(gpm)
AWWA
Ratio
Single
Family
All Other
Standard
Customers
High
Pressure
Zone Total
Single
Family
All Other
Standard
Customers
High
Pressure
Zone Total
3/4" 30 1.00 19,613 1,671 1,740 21,284 19,613 1,671 1,740 21,284 1" 50 1.67 1,452 1,448 225 2,900 2,420 2,413 375 4,833
1 1/2" 100 3.33 22 1,037 15 1,059 73 3,457 50 3,530
2" 160 5.33 8 710 14 718 43 3,787 75 3,829
3" 350 11.67 0 144 3 144 0 1,680 35 1,680
4" 630 21.00 1 68 2 69 21 1,428 42 1,449
6" 1,300 43.33 0 26 0 26 0 1,127 0 1,127
8" 2,400 80.00 0 31 0 31 0 2,480 0 2,480
10" 3,800 126.67 0 12 1 12 0 1,520 127 1,520
12" 5,000 166.67 0 0 0 0 0 0 0 0
Total 21,096 5,147 2,000 26,243 22,170 19,562 2,443 41,732
Equivalent Fire Lines
Number of Fire Lines Number of Equivalent Lines
Fire Line Size Private Fire Public
Fire Fire Line Ratio Total Private Fire Public Fire Total 2" 39 0 6.19 39 241 241
3" 3 0 17.98 3 54 54
4" 130 2994 38.32 38.32 3124 4,982 114,728 119,710 6" 211 0 111.31 211 23,487 23,487 8" 184 0 237.21 184 43,646 43,646 10" 36 0 426.58 36 15,357 15,357 12" 1 0 689.04 1 689 689 Total 604 2994 0.00 3598 88,455 114,728 203,183
Proportion of Equivalent Fire Lines
Private Fire 43.5%
Public Fire 56.5%
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Table 3-13 allocates the O&M and capital expenses to each cost component. The functional costs are allocated according to industry standards based on the nature of the water function. For example, water supply costs are allocated 100 percent to the supply component, distribution lines are designed for max hour plus fire flow and are allocated to max hour, and reservoirs are designed for max day and are allocated to max day. Water resources costs, which represent engineering costs, are allocated based on the assets distribution, represented by the capital allocation. Water operations costs, excluding the pumping, meters, and billing costs, are allocated based on the average of max day and max hour.
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Table 3-13 shows the total resulting cost causation component allocation for O&M expenses. This resulting allocation is used to allocate the City’s operating revenue requirement to the cost causation components.
Capital costs are allocated based on the assets so as not to cause significant changes to the capital allocation from year to year as different projects are implemented. Over the long term this provides stability and equitability as the assets are replaced over time.
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Table 3-13 also shows the total resulting allocation for the City’s assets. The resulting total asset allocation is derived in a similar manner as the O&M allocation - first, Raftelis functionalized the City’s assets and then allocated them to the cost causation components resulting in the asset total allocation shown at the bottom of
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Table 3-13. Pump Stations are designed for Max Day and are allocated to Max Day, except the power costs associated with pumping are allocated to Pumping based on pumping costs.
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Table 3-13: Allocation of Functionalized O&M and Capital Expenses to Cost Causation Components O&M Allocation Rationale Supply Base Max Day Max Hour Fire Pumping Meter Customer Revenue
Offset General Total
Program 981105 - Water Supply Supply 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 100% Program 981106 - Water Operations Max Hour 0% 38% 30% 14% 15% 0% 0% 0% 0% 3% 100% Pumping 0% 0% 0% 0% 0% 0% 100% 0% 0% 0% 0% 100%
Meters Meter 0% 0% 0% 0% 0% 0% 100% 0% 0% 0% 100%
Billing Customer 0% 0% 0% 0% 0% 0% 10% 90% 0% 0% 100%
Program 981107 - Water Resources Asset Allocation 0% 37% 28% 22% 12% 1% 0% 0% 0% 0% 100% Program 981108 - Water Administration Custom 0% 0% 0% 0% 0% 0% 0% 2% 0% 98% 100% Program 981109 - Financial Obligations General 0% 0% 0% 0% 0% 0% 0% 0% 0% 100% 100% WRD Goldsworthy Desalter Supply 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 100%
O&M Expenses Supply Base Max Day Max Hour Fire Pumping Meter Customer Revenue
Offset General FY 2025 Budget
Program 981105 - Water Supply $26,251,775 $0 $0 $0 $0 $0 $0 $0 $0 $0 $26,251,775 Program 981106 - Water Operations $0 $2,707,911 $2,159,285 $1,009,528 $1,068,912 $0 $0 $0 $0 $180,445 $7,126,082 Pumping $0 $0 $0 $0 $0 $154,170 $0 $0 $0 $0 $154,170
Meters $0 $0 $0 $0 $0 $0 $599,550 $0 $0 $0 $599,550
Billing $0 $0 $0 $0 $0 $0 $68,520 $616,680 $0 $0 $685,200 Program 981107 - Water Resources $0 $9,431 $7,130 $5,528 $3,158 $226 $0 $0 $0 $0 $25,472 Program 981108 - Water Administration $0 $0 $0 $0 $0 $0 $0 $55,444 $0 $2,716,736 $2,772,180 Program 981109 - Financial Obligations $0 $0 $0 $0 $0 $0 $0 $0 $0 $1,179,095 $1,179,095 WRD Goldsworthy Desalter $991,831 $0 $0 $0 $0 $0 $0 $0 $0 $0 $991,831 Total $27,243,606 $2,717,342 $2,166,415 $1,015,056 $1,072,070 $154,396 $668,070 $672,124 $0 $4,076,276 $39,785,355
Operating Allocation 68.5% 6.8% 5.4% 2.6% 2.7% 0.4% 1.7% 1.7% 0.0% 10.2% 100.0%
Capital Allocation Rationale Supply Base Max Day Max Hour Fire Pumping Meter Customer Revenue
Offset General Total
Pipelines Max Hour 0% 32% 24% 28% 15% 0% 0% 0% 0% 0% 100% Wells Max Day Less Fire 0% 56% 44% 0% 0% 0% 0% 0% 0% 0% 100% Reservoirs Max Day 0% 49% 36% 0% 15% 0% 0% 0% 0% 0% 100% Pump Stations Pumping 0% 51% 39% 0% 0% 10% 0% 0% 0% 0% 100% Treatment Stations Max Day Less Fire 0% 56% 44% 0% 0% 0% 0% 0% 0% 0% 100% Turn Outs Max Hour 0% 32% 24% 28% 15% 0% 0% 0% 0% 0% 100%
Capital Expenditures Supply Base Max Day Max Hour Fire Pumping Meter Customer Revenue
Offset General FY 2025 CIP
Pipelines $0 $14,070,795 $10,519,083 $12,294,939 $6,509,085 $0 $0 $0 $0 $0 $43,393,901 Wells $0 $2,549,896 $1,992,247 $0 $0 $0 $0 $0 $0 $0 $4,542,143 Reservoirs $0 $1,702,831 $1,273,007 $0 $525,148 $0 $0 $0 $0 $0 $3,500,985 Pump Stations $0 $2,585,736 $2,020,248 $0 $0 $511,776 $0 $0 $0 $0 $5,117,760 Treatment Stations $0 $205,345 $160,437 $0 $0 $0 $0 $0 $0 $0 $365,782 Turn Outs $0 $285,085 $213,124 $249,104 $131,879 $0 $0 $0 $0 $0 $879,192 Total $0 $21,399,686 $16,178,146 $12,544,043 $7,166,112 $511,776 $0 $0 $0 $0 $57,799,763
Capital Allocation 0.0% 37.0% 28.0% 21.7% 12.4% 0.9% 0.0% 0.0% 0.0% 0.0% 100.0%
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Table 3-14 shows the allocation of the revenue offsets. All revenue offsets are allocated based on the operating allocation except for wholesale water sales and investment earnings. Wholesale water sale revenue is allocated to offset the cost of supply, and interest earnings are allocated to the Revenue Offset cost component. These investment earnings will be used to offset the increasing cost of water supply to lower the Tier 1 commodity rate for single family and low-income senior and disabled customers and reduce their bill impacts.
Table 3-14: Revenue Offset Allocation
Revenue Offsets Rationale Supply Base Max Day Max Hour Fire Pumping Meter Customer Revenue
Offset General Total
Late Charge Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Water Disconnect Fees Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Direct & Indirect Labor Fee Revenues Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Chemical Fee Revenues Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Water Quality Analysis & Testing Fee Revenues Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Repairs & Maintenance Fee Revenues Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Other Related Fee Revenues Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Wholesale Water Sales Supply 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 100% Water Start Service Fee Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Fire Flow Test Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Engineering,Overhead & Inspect Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Capital Received-Parts & Installation Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Transfers from General Fund Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Miscellaneous Revenues Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Change in Fair Market Value Operating 68% 7% 5% 3% 3% 0% 2% 2% 0% 10% 100% Investment Earnings Revenue Offset 0% 0% 0% 0% 0% 0% 0% 0% 100% 0% 100%
Revenue Offsets Supply Base Max Day Max Hour Fire Pumping Meter Customer Revenue
Offset General Total
Late Charge $41,086 $4,098 $3,267 $1,531 $1,617 $233 $1,008 $1,014 $0 $6,147 $60,000 Water Disconnect Fees $47,934 $4,781 $3,812 $1,786 $1,886 $272 $1,175 $1,183 $0 $7,172 $70,000 Direct & Indirect Labor Fee Revenues $376,621 $37,565 $29,949 $14,032 $14,820 $2,134 $9,236 $9,292 $0 $56,351 $550,000 Water Quality Analysis & Testing Fee Revenues $10,271 $1,025 $817 $383 $404 $58 $252 $253 $0 $1,537 $15,000 Repairs & Maintenance Fee Revenues $27,391 $2,732 $2,178 $1,021 $1,078 $155 $672 $676 $0 $4,098 $40,000 Other Related Fee Revenues $34,238 $3,415 $2,723 $1,276 $1,347 $194 $840 $845 $0 $5,123 $50,000 Wholesale Water Sales $940,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $940,000 Water Start Service Fee $13,695 $1,366 $1,089 $510 $539 $78 $336 $338 $0 $2,049 $20,000 Fire Flow Test $13,695 $1,366 $1,089 $510 $539 $78 $336 $338 $0 $2,049 $20,000 Engineering,Overhead & Inspect $13,695 $1,366 $1,089 $510 $539 $78 $336 $338 $0 $2,049 $20,000 Capital Received-Parts & Installation $198,582 $19,807 $15,791 $7,399 $7,814 $1,125 $4,870 $4,899 $0 $29,712 $290,000 Transfers from General Fund $12,520 $1,249 $996 $466 $493 $71 $307 $309 $0 $1,873 $18,284 Miscellaneous Revenues $3,424 $342 $272 $128 $135 $19 $84 $84 $0 $512 $5,000 Investment Earnings $0 $0 $0 $0 $0 $0 $0 $0 $542,788 $0 $542,788 Total $1,733,152 $79,111 $63,072 $29,552 $31,212 $4,495 $19,450 $19,568 $542,788 $118,674 $2,641,072
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3.6.2. Revenue Requirement Determination
Table 3-15 shows the revenue requirement derivation with the total revenue required from rates.
The totals shown in the “Operating” and “Capital” columns are the total O&M and capital revenue requirements, respectively, that are allocated to the cost components using the allocation percentages shown at the bottom of
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Table 3-13 and Table 3-14.
Raftelis calculated the revenue requirement using FY 2025 expenses, which include O&M expenses, rate-funded capital expenses, and existing and proposed debt service. To arrive at the rate revenue requirement, we subtract revenue offsets from other expenses and make adjustments for annual cash balances (Table 3-8) and for the fact that the impending rate adjustment will generate the additional revenue for four months4 of the fiscal year (Table 3-8) and we must therefore annualize the rate increase to determine the rates. The adjustments are subtracted (the negative adjustment to annualize the rate increase is therefore added as a result of subtracting a negative number) to arrive at the total revenue requirement from rates. This is the amount that fixed charge and commodity rates are designed to collect.
4 With January 1st implementation, the bills in March are the first bills that will reflect the impacts of the proposed rates.
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Table 3-15: Revenue Requirement Determination
Revenue Requirement - FY 2025 Operating Capital Total
Revenue Requirements
O&M Expenses $39,785,355 $0 $39,785,355
Debt Service $0 $1,644,515 $1,644,515
Rate Funded CIP $0 $3,900,000 $3,900,000
Total - Revenue Requirements $39,785,355 $5,544,515 $45,329,870
Revenue Offsets
Late Charge $60,000 $0 $60,000
Water Disconnect Fees $70,000 $0 $70,000
Direct & Indirect Labor Fee Revenues $550,000 $0 $550,000 Water Quality Analysis & Testing Fee Revenues $15,000 $0 $15,000 Repairs & Maintenance Fee Revenues $40,000 $0 $40,000
Other Related Fee Revenues $50,000 $0 $50,000
Wholesale Water Sales $940,000 $0 $940,000
Water Start Service Fee $20,000 $0 $20,000
Fire Flow Test $20,000 $0 $20,000
Engineering,Overhead & Inspect $20,000 $0 $20,000
Capital Received-Parts & Installation $290,000 $0 $290,000 Transfers from General Fund $18,284 $0 $18,284
Miscellaneous Revenues $5,000 $0 $5,000
Investment Earnings $0 $542,788 $542,788
Total - Revenue Offsets $2,098,284 $542,788 $2,641,072
Less Adjustments
Transfer from (to) Reserves $0 $2,728,914 $2,728,914
Additional Revenue to Annualize Rate Increase -$1,257,817 $0 -$1,257,817 Total - Adjustments -$1,257,817 $2,728,914 $1,471,097
Total Revenue to be Recovered from Rates $38,944,888 $2,272,813 $41,217,701 Revenue Requirement without Offsets $41,043,172 $2,815,601 $43,858,773
3.6.3. Unit Cost Component Derivation
Our end goal is to proportionately distribute the cost causation components to each user class. To do so we must calculate the cost causation component unit costs, which starts by assessing the total service units demanded by each class for each cost causation component. This is shown in City of Torrance / Water Cost of Service and Rate Study
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Table 3-16. The capacity or peaking factor for each customer class is taken from Table 3-11.
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Table 3-16: Service Units by Class
Max Day Max Hour
Customer Class
Annual
Use (ccf)
Average Daily
Use (ccf/day)
Peaking
Factor
Total Capacity
(ccf/day)
Extra Capacity
(ccf/day)
Peaking
Factor
Total Capacity
(ccf/day)
Extra Capacity
(ccf/day)
Number of
Equiv. Meters
Number of Equiv.
Fire Lines
Single Family 22,170
Tier 1 1,380,678 3,783 1.09 4,123 340 1.64 6,185 2,062
Tier 2 446,130 1,222 1.32 1,613 391 1.98 2,420 807
Tier 3 300,471 823 1.76 1,449 626 2.64 2,173 724
All Other Standard Customers 19,562 0
Tier 1 452,211 1,239 1.07 1,326 87 1.61 1,988 663
Tier 2 4,204,921 11,520 1.24 14,285 2,765 1.86 21,428 7,143
Low Income Senior & Disabled
Tier 1 18,260 50 1.16 58 8 1.74 87 29
Tier 2 4,441 12 1.50 18 6 2.25 27 9
Tier 3 3,261 9 1.64 15 6 2.46 22 7
High Pressure Zone 2,443
Private Fire 88,455
Total 6,810,374 18,659 22,887 4,229 34,331 11,444 41,732 88,455
Table 3-17 shows the revenue requirement allocation to each cost causation component. The operating revenue requirement shown in Table 3-15 is allocated to the cost causation components using the resulting O&M allocation from
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Table 3-13. Similarly, the capital revenue requirement in Table 3-15 is allocated to the cost causation components using the asset resulting allocation from City of Torrance / Water Cost of Service and Rate Study
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Table 3-13. The Revenue Offset is based on the allocation developed in Table 3-14. General and Administrative costs, which cannot be tied to a specific function, are redistributed in proportion to the resulting allocation of the other cost causation components, excluding Supply. The Fire cost component includes public fire protection costs and private fire service. To determine the charges for the private fire service, the public protection costs are reallocated to the meter component based on the total fire hydrant capacity of the system.
Table 3-17 Revenue Requirement Allocation
Revenue Requirement Supply
Base
Delivery Max Day Max Hour Fire Pumping Meter Customer
Revenue
Offset General Total
Operating Revenue Requirement $28,104,915 $2,803,251 $2,234,906 $1,047,147 $1,105,964 $159,277 $689,191 $693,373 $0 $4,205,148 $41,043,172 Capital Revenue Requirement $0 $1,042,443 $788,086 $611,058 $349,083 $24,930 $0 $0 $0 $0 $2,815,601 Revenue Offsets -$1,733,152 -$79,111 -$63,072 -$29,552 -$31,212 -$4,495 -$19,450 -$19,568 -$542,788 -$118,674 -$2,641,072 Total - Cost of Service $26,371,763 $3,766,583 $2,959,921 $1,628,654 $1,423,835 $179,712 $669,742 $673,805 -$542,788 $4,086,474 $41,217,701 Allocation of Fire Protection Costs $0 $0 $0 $0 -$803,972 $0 $803,972 $0 $0 $0 $0 Total - Cost of Service with Fire $26,371,763 $3,766,583 $2,959,921 $1,628,654 $619,863 $179,712 $1,473,714 $673,805 -$542,788 $4,086,474 $41,217,701 Allocation of General Costs $0 $1,361,857 $1,070,197 $588,861 $224,119 $64,977 $532,840 $243,623 $0 -$4,086,474 $0 Total - Adjusted Cost of Service $26,371,763 $5,128,440 $4,030,118 $2,217,515 $843,983 $244,689 $2,006,554 $917,428 -$542,788 $0 $41,217,701
Table 3-18 shows the cost causation component allocation. The cost of service allocation for each cost component is allocated directly to their corresponding rate components, with the exception of Max Day and Max Hour. The Max Day and Max Hour costs are essentially fixed costs which are spread on fixed meter charges and variable commodity rates. Five percent of peaking costs are allocated to be recovered on the Meter charge which maintains the current fixed revenue recovery of 11% of total rate revenue.
Table 3-18: Cost Component Allocation
Cost
Components
Cost of
Service Meter
Private
Fire Customer Pumping
Base
Delivery Max Day Max Hour
Revenue
Offset Supply Total
Supply $26,371,763 100% 100%
Base $5,128,440 100% 100%
Max Day $4,030,118 5% 95% 100%
Max Hour $2,217,515 5% 95% 100%
Fire $843,983 100% 100%
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Pumping $244,689 100% 100%
Meter $2,006,554 100% 100%
Customer $917,428 100% 100%
Revenue Offset -$542,788 100% 100%
Total $41,217,701 $2,318,935 $843,983 $917,428 $244,689 $5,128,440 $3,828,612 $2,106,639 -$542,788 $26,371,763 $41,217,701
Table 3-19 shows the cost causation component unit cost derivation. The total adjusted cost of service from Table 3-18 is divided by the units of service from Table 3-16 to calculate the unit cost. For example, the unit cost for the base component is determined by dividing the total base cost by total water use in hcf; annual billing and customer service costs are divided by the estimated number of annual monthly bills. The unit costs are used to distribute the cost causation components to the customer classes.
Table 3-19: Unit Cost Derivation
Unit Costs Meter
Private
Fire Customer Pumping
Base
Delivery Max Day Max Hour
Revenue
Offset Supply
Cost of Service $2,318,935 $843,983 $917,428 $244,689 $5,128,440 $3,828,612 $2,106,639 -$542,788 $26,371,763
Units of
Service 500,788 1,061,465 322,164 29,320 6,810,374 4,229 11,444 1,398,938 6,810,374
annual equiv.
meters
annual
equiv. lines
annual
bills
annual
equiv. pump
zone meters
annual use
(ccf)
peak capacity
(ccf/day)
peak capacity
(ccf/day)
Annual
Res Tier 1
use
annual use
(ccf)
Unit Cost $4.63 $0.80 $2.85 $8.35 $0.75 $905.41 $184.09 -$0.39 $3.87 equiv. meter equiv. line bill ccf ccf ccf/day ccf/day ccf ccf
Distribution of Cost Causation Components to Customer Classes The final step in a cost of service analysis is to distribute the cost causation components to the user classes using the unit costs derived in Table 3-19. This is the ultimate goal of a cost of service analysis and yields the cost to serve each customer class. Table 3-20 shows the derivation of the cost to serve (i.e., cost of service for) each class and tier. The Supply, Delivery, Max Day, and Max Hour cost components are collected through the commodity (volumetric) rates ($/hcf) for potable water. The Fire, Pumping, Meter, and Customer cost components are collected through the City’s monthly meter service charges providing fixed revenue. The non-rate Revenue Offset is used to reduce the impact on the Tier 1 residential rate. The proposed fixed revenue from rates is approximately 11 percent, the same as the existing fixed revenue.
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To derive the cost to serve each class, the unit costs from Table 3-19 are multiplied by the service units shown in Table 3-16 for each customer class. For example, the supply costs for the SFR class is calculated by multiplying the supply unit cost ($3.87 per HCF) by the annual SFR use in each tier (Table 3-16). Similarly, the customer costs are derived by multiplying the customer unit cost ($2.85 per bill) (Table 3-19) by the number of bills (322,164 bills) (Table 3-16). Similar calculations for each of the remaining user classes and tiers and cost components yield the total cost to serve each user class shown in Table 3-20. Note that the total cost of service is equal to the revenue requirement in Table 3-15 as intended. We have now calculated the cost to serve each user class and can proceed to derive rates to collect the cost to serve each class.
Table 3-20: Allocation of Cost to Customer Class
Customer Class Meter
Private
Fire Customer Pumping
Base
Delivery Max Day Max Hour
Revenue
Offset Supply
Proposed
Revenue
Single Family $1,231,918 $720,902 $13,146,672
Tier 1 $1,039,697 $308,237 $379,511 -$535,703 $5,346,390 Tier 2 $335,951 $354,129 $148,505 $1,727,547
Tier 3 $226,265 $566,456 $133,358 $1,163,511
All Other Standard
Customers $1,087,018 $175,886 $26,822,417
Tier 1 $340,530 $78,522 $122,020 $1,751,095
Tier 2 $3,166,447 $2,503,336 $1,314,875 $16,282,688 Low Income Senior &
Disabled $139,300
Tier 1 $13,750 $7,247 $5,341 -$7,085 $70,707
Tier 2 $3,344 $5,508 $1,680 $17,197
Tier 3 $2,456 $5,177 $1,349 $12,628
High Pressure Zone $244,689 $244,689
Private Fire $843,983 $20,640 $864,623
Total $2,318,935 $843,983 $917,428 $244,689 $5,128,440 $3,828,612 $2,106,639 -$542,788 $26,371,763 $41,217,701
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3.7. Rate Derivation
3.7.1. Existing Rate Structure and Rates
The City’s existing rate structure consists of a monthly Readiness-to-Serve (RTS) charge, a monthly pumping service charge, and a monthly private fire service charge. These charges are fixed charges determined on the basis of the size of the meter serving a property. In addition, the City has a tiered commodity rate structure for SFR customers, Low Income Senior & Disabled customers, and All Other customers. Recycled water customers have a different uniform rate. Table 3-21 through Table 3-24 shows the existing rate structure and rates. The monthly rates are shown; however, the City bills every two months.
Table 3-21: Existing Monthly Service Charges
Meter Size Current Service
Charges
3/4" $7.48
1" $10.74
1 1/2" $18.89
2" $28.68
3" $59.64
4" $105.30
6" $214.49
8" $393.83
10" $622.03
12" $817.65
Table 3-22: Existing Monthly Pumping Charges
Meter
Size
Current Pumping
Charge
3/4" $6.40
1" $10.66
1 1/2" $21.29
2" $34.08
3" $75.54
4" $134.17
6" $276.84
8" $511.10
10" $809.22
12" $1,064.76
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Table 3-23: Existing Monthly Private Fire Charges
Fire
Line
Size
Current Private Fire
Charge
2" $6.43
3" $13.71
4" $26.29
6" $71.40
8" $149.24
10" $266.32
12" $428.60
Table 3-24: Existing Commodity Rates
Customer Class Monthly Tiers (hcf) Current Rates
Single Family
Tier 1 0-7 $3.42
Tier 2 8-12 $5.77
Tier 3 13+ $6.98
All Other Customers
Tier 1 0-10 $3.89
Tier 2 11+ $5.55
Senior Low-Income or Disabled Low-Income
Tier 1 0-7 $2.93
Tier 2 8-12 $5.29
Tier 3 13+ $6.50
3.7.2. Proposed Monthly Fixed Charges
Table 3-25 through Table 3-27 show the derivation of the RTS charge, the monthly pumping service charge and the monthly fire service charge, respectively. The cost of service analysis from Table 3-20 feeds into the meter charge derivation as the meter charge is designed to collect the amount of revenue shown in the “Meter” and “Customer” columns of Table 3-20.
3.7.2.1. Fixed Meter Charges Components
There are two components that comprise the fixed meter charges: meter capacity and customer service (or billing), both are described below. This charge recognizes the fact that even when a customer does not use any water, the City incurs fixed costs in connection with maintaining the ability or readiness to serve each connection.
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3.7.2.1.1. Meter Capacity Component
The meter capacity component collects capacity (also known as peaking) related costs. Capacity related costs can be allocated to and collected through the meter service charge by meter size. This reflects the fact that larger meters have the potential to demand more capacity compared to smaller meters. The potential capacity demanded is proportional to the potential flow through each meter size as established by the computed AWWA hydraulic capacity ratios which are shown in the “Capacity Ratio” column of Table 3-25 through Table 3-27. The ratios show the potential flow through each meter size compared to the flow through a 3/4-inch meter. For example, the “Capacity Ratio” column in Table 3-25 shows that the flow through a 2-inch meter is 5.33 times that of a 3/4- inch and therefore the meter capacity component of the RTS charge is 5.3 times that of the 3/4-inch meter. The meter capacity component for a 3/4-inch meter is normalized to one (1) in the “Meter” column of Table 3-25 and the capacity component for larger meters is scaled up using the AWWA capacity ratios shown in the “Capacity Ratio” column of Table 3-25.
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Table 3-26 shows similar calculations for the meters that require pumping services and Table 3-27 shows similar calculations for private fire lines based on “Fire Ratio”. The only difference is that private fire lines have different ratios than the regular meters.
3.7.2.1.2. Customer/Billing Component
The customer/billing component recovers costs associated with meter reading, customer billing and collection as well as customer service costs. These costs are the same for all meter sizes as it costs the same to provide billing and customer services to a small meter as it does a larger meter. The customer/billing component is derived in the “Customer” column of Table 3-19.
Table 3-25: Derivation of the Monthly RTS Charge
Meter Size -
Fixed Monthly
Charge
Capacity
Ratio Meter Customer
Proposed
Monthly
Charge
Current
Monthly
Charge
Difference
($)
Difference
(%)
3/4" 1.00 $4.63 $2.85 $7.48 $7.48 $0.00 0%
1" 1.67 $7.72 $2.85 $10.57 $10.74 -$0.17 -2%
1 1/2" 3.33 $15.44 $2.85 $18.29 $18.89 -$0.60 -3%
2" 5.33 $24.70 $2.85 $27.55 $28.68 -$1.13 -4%
3" 11.67 $54.02 $2.85 $56.88 $59.64 -$2.76 -5%
4" 21.00 $97.24 $2.85 $100.09 $105.30 -$5.21 -5%
6" 43.33 $200.66 $2.85 $203.51 $214.49 -$10.98 -5%
8" 80.00 $370.45 $2.85 $373.30 $393.83 -$20.53 -5%
10" 126.67 $586.54 $2.85 $589.39 $622.03 -$32.64 -5%
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Table 3-26: Derivation of the Monthly Pumping Service Charge Meter Size -
Monthly Pumping
Charge
Capacity
Ratio
Pumping
Component Customer
Proposed
Monthly
Charge
Current
Monthly
Charge
Difference
($)
Difference
(%)
3/4" 1.00 $8.35 $0.00 $8.35 $6.40 $1.95 30%
1" 1.67 $13.91 $0.00 $13.91 $10.66 $3.25 30%
1 1/2" 3.33 $27.82 $0.00 $27.82 $21.29 $6.53 31%
2" 5.33 $44.51 $0.00 $44.51 $34.08 $10.43 31%
3" 11.67 $97.36 $0.00 $97.37 $75.54 $21.83 29%
4" 21.00 $175.25 $0.00 $175.26 $134.17 $41.09 31%
6" 43.33 $361.64 $0.00 $361.64 $276.84 $84.80 31%
8" 80.00 $667.64 $0.00 $667.64 $511.10 $156.54 31%
10" 126.67 $1,057.09 $0.00 $1,057.10 $809.22 $247.88 31%
Table 3-27: Derivation of the Monthly Fire Service Charge Fire Line
Size Fire Ratio
Private
Fire Customer
Proposed
Monthly
Charge
Current
Monthly
Charge
Difference
($)
Difference
(%)
2" 6.19 $4.92 $2.85 $7.77 $6.43 $1.34 21%
3" 17.98 $14.30 $2.85 $17.15 $13.71 $3.44 25%
4" 38.32 $30.47 $2.85 $33.32 $26.29 $7.03 27%
6" 111.31 $88.50 $2.85 $91.36 $71.40 $19.96 28%
8" 237.21 $188.61 $2.85 $191.46 $149.24 $42.22 28%
10" 426.58 $339.18 $2.85 $342.03 $266.32 $75.71 28%
12" 689.04 $547.87 $2.85 $550.72 $428.60 $122.12 28%
3.7.3. Proposed Commodity Rates
3.7.3.1. Unit Cost Definitions
The commodity rates for each class and tier are derived by summing of the unit rates ($/HCF) for:
1. Supply
2. Base Delivery
3. Peaking
Supply costs are costs related to the cost of purchasing and producing water. The City has three sources of water, each incurring different costs, as shown in Table 3-28. Each source of supply is allocated to the customer classes based on the number of accounts in each class. Thus, each customer is allocated the same amount of each source of water supply. Within each customer class, each available supply is allocated to each tier based on the usage in each tier, with priority given to the lower tiers. For example, the SFR class is allocated 905,452 hcf of groundwater, which is in turn allocated entirely to Tier 1 because it represents the most essential use. Since this level of supply is City of Torrance / Water Cost of Service and Rate Study
Water Cost of Service Study Report | 14
not enough to satisfy the demand in SFR Tier 1, we take the next least cost supply to meet the demand in that tier. most This principle applies to the All Other Standard Customers and Low Income Senior & Disabled customer classes as well.
Table 3-28: Allocation of Water Supply
Supply Unit
Cost
Annual
Use (ccf)
GW
Wells Desalter MWD Total Unit Cost
Single Family
Tier 1 1,380,678 905,452 475,226 0 1,380,678 $2.68
Tier 2 446,130 0 430,226 15,904 446,130 $3.59
Tier 3 300,471 0 0 300,471 300,471 $4.37
All Other Standard Customers
Tier 1 452,211 225,672 225,672 866 452,211 $2.89
Tier 2 4,204,921 0 0 4,204,921 4,204,921 $4.37
Low Income Senior &
Disabled
Tier 1 18,260 18,260 0 0 18,260 $2.22
Tier 2 4,441 1,251 3,190 0 4,441 $3.18
Tier 3 3,261 0 3,261 0 3,261 $3.56
Total 6,810,374 1,150,636 1,137,575 4,522,163 6,810,374 $3.87
Base Delivery costs are the operating and capital costs associated with delivering water to all customers at a constant average rate of use – also known as serving customers under average daily demand conditions. Therefore, base delivery costs are spread over all units of water irrespective of customer class or tiers. Based on Table 3-18, the delivery or base unit cost is $0.75 per hcf.
Peaking costs, or extra-capacity costs, represent costs incurred to meet customer peak demands in excess of base use (or average daily demand). Total extra capacity costs are comprised of maximum day and maximum hour demands. The peaking costs are distributed to each tier and class using peaking factors derived from customer use data. Table 3-29 shows the peaking unit cost for each customer class and tier, which is calculated by dividing the total peaking costs (sum of max day and max hour) for each class and tier, from Table 3-20, by the annual usage in each class and tier, from Table 3-16
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Table 3-16.
Table 3-29: Peaking Cost Calculation
Peaking Unit Cost
Annual
Use (ccf)
Peaking
Costs
Unit
Cost
Single Family
Tier 1 1,380,678 $687,748 $0.50
Tier 2 446,130 $502,634 $1.13
Tier 3 300,471 $699,814 $2.33
All Other Standard Customers
Tier 1 452,211 $200,541 $0.44
Tier 2 4,204,921 $3,818,212 $0.91
Low Income Senior & Disabled
Tier 1 18,260 $12,589 $0.69
Tier 2 4,441 $7,188 $1.62
Tier 3 3,261 $6,526 $2.00
Total 6,810,374 $5,935,251 $0.87
Table 3-30 shows the proposed commodity rate, which is the sum of the three previously discussed rate components, for each customer class. The Supply component is from Table 3-28; the Delivery component is from Table 3-19; and the Peaking component is from Table 3-29. The Low Income Senior & Disabled Rate has a discount of $0.40 from the SFR rate and the discount to those customers is provided from non-rate revenues. Additionally, revenue offset calculated in Table 3-19 is included in the Tier 1 rate calculation for both SFR and Low-income customers.
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Table 3-30: Proposed Commodity Rates
Commodity
Charges
Monthly
Tier
(hcf)
Usage
(hcf) Supply
Base
Delivery Peaking
Revenue
Offset Discount
Total
Rate
Current
Rate
Difference
($)
Difference
(%)
Single Family
Tier 1 0-7 1,380,678 $2.68 $0.75 $0.50 -$0.39 $0.00 $3.55 $3.42 $0.14 4.0% Tier 2 8-12 446,130 $3.59 $0.75 $1.13 $0.00 $0.00 $5.47 $5.77 -$0.30 -5.1% Tier 3 13+ 300,471 $4.37 $0.75 $2.33 $0.00 $0.00 $7.46 $6.98 $0.48 6.8%
All Other Standard Customers
Tier 1 0-10 452,211 $2.89 $0.75 $0.44 $0.00 $0.00 $4.09 $3.89 $0.20 5.2% Tier 2 11+ 4,204,921 $4.37 $0.75 $0.91 $0.00 $0.00 $6.04 $5.55 $0.49 8.8%
Low Income Senior & Disabled
Tier 1 0-7 18,260 $2.22 $0.75 $0.69 -$0.39 -$0.50 $2.78 $2.93 -$0.15 -5.2% Tier 2 8-12 4,441 $3.18 $0.75 $1.62 $0.00 -$0.50 $5.06 $5.29 -$0.23 -4.3% Tier 3 13+ 3,261 $3.56 $0.75 $2.00 $0.00 -$0.50 $5.82 $6.50 -$0.68 -10.5%
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Table 3-31 through Table 3-34 show the proposed rates for the next five years. These rates are effective on January 1, 2025, and in January of each subsequent year.
Table 3-31: Proposed Monthly Service Charges
Meter Size Proposed
FY 2025
Proposed
FY 2026
Proposed
FY 2027
Proposed
FY 2028
Proposed
FY 2029
3/4" $7.48 $7.97 $8.45 $8.96 $9.50
1" $10.57 $11.26 $11.94 $12.66 $13.42
1 1/2" $18.29 $19.48 $20.65 $21.89 $23.21
2" $27.55 $29.35 $31.12 $32.99 $34.97
3" $56.88 $60.58 $64.22 $68.08 $72.17
4" $100.09 $106.60 $113.00 $119.78 $126.97
6" $203.51 $216.74 $229.75 $243.54 $258.16
8" $373.30 $397.57 $421.43 $446.72 $473.53
10" $589.39 $627.71 $665.38 $705.31 $747.63
Table 3-32: Proposed Monthly Pumping Charges
Meter Size Proposed
FY 2025
Proposed
FY 2026
Proposed
FY 2027
Proposed
FY 2028
Proposed
FY 2029
3/4" $8.35 $8.90 $9.44 $10.01 $10.62
1" $13.91 $14.82 $15.71 $16.66 $17.66
1 1/2" $27.82 $29.63 $31.41 $33.30 $35.30
2" $44.51 $47.41 $50.26 $53.28 $56.48
3" $97.37 $103.70 $109.93 $116.53 $123.53
4" $175.26 $186.66 $197.86 $209.74 $222.33
6" $361.64 $385.15 $408.26 $432.76 $458.73
8" $667.64 $711.04 $753.71 $798.94 $846.88
10" $1,057.10 $1,125.82 $1,193.37 $1,264.98 $1,340.88
Table 3-33: Proposed Monthly Private Fire Charges
Line Size Proposed
FY 2025
Proposed
FY 2026
Proposed
FY 2027
Proposed
FY 2028
Proposed
FY 2029
2" $7.77 $8.28 $8.78 $9.31 $9.87
3" $17.15 $18.27 $19.37 $20.54 $21.78
4" $33.32 $35.49 $37.62 $39.88 $42.28
6" $91.36 $97.30 $103.14 $109.33 $115.89
8" $191.46 $203.91 $216.15 $229.12 $242.87
10" $342.03 $364.27 $386.13 $409.30 $433.86
12" $550.72 $586.52 $621.72 $659.03 $698.58
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Table 3-34: Proposed Commodity Rates
Customer
Class
Monthly Tiers
(hcf)
Proposed
FY 2025
Proposed
FY 2026
Proposed
FY 2027
Proposed
FY 2028
Proposed
FY 2029
Single
Family
Tier 1 0-7 $3.55 $3.79 $4.02 $4.27 $4.53
Tier 2 8-12 $5.47 $5.83 $6.18 $6.56 $6.96
Tier 3 13+ $7.46 $7.95 $8.43 $8.94 $9.48
All Other Standard Customers
Tier 1 0-10 $4.09 $4.36 $4.63 $4.91 $5.21
Tier 2 11+ $6.04 $6.44 $6.83 $7.24 $7.68
Low Income Senior &
Disabled
Tier 1 0-7 $2.78 $2.97 $3.15 $3.34 $3.55
Tier 2 8-12 $5.06 $5.39 $5.72 $6.07 $6.44
Tier 3 13+ $5.82 $6.20 $6.58 $6.98 $7.40
3.8. Summary of Cost of Service
Raftelis was engaged to perform a water rate study for the City of Torrance. Raftelis has prepared a report that details the steps in conducting the COS study with numerous tables and graphics to show the development of rates. The COS study is conducted consistent with Proposition 218 requirements and industry guidelines which are detailed in the American Water Works Association (AWWA) Principal of Water Rates, Fees, and Charges, M1 Manual of Water Supply Practices. Some of the analysis and descriptions can be complex, and therefore a simple explanation of the COS analysis is provided.
COS is the process by which we identify the total revenue requirements of the utility, allocate those costs equitably amongst the different customer classes, and then design rates to meet the City’s objectives, such as conservation and affordability.
Revenue requirements are the revenues that need to be recovered from rates charged to customers.
Revenue requirements include operating expenses, capital expenses, and reserve requirements (which are like checking and saving accounts for the utility). To ensure that these revenue requirements are equitably divided between user classes, we must follow an industry approved process. These revenue requirements must be separated into the different functions of the utility.
These functions include cost of supply, cost of providing service under average conditions and peak conditions, and costs related to maintenance of meters and customer service costs such as meter reading, billing, customer service. The COS analysis requires us to take each function of the water utility and spread the cost to those elements that cause the cost to be incurred.
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Since water systems are designed to provide service under peak conditions, there are costs associated with this. For example, a reservoir may be a 1 million-gallon (mg) tank that is used to meet average use requirements. However, storage is needed to meet peak summer requirements and therefore it may be sized twice as large at 2 mg. In this case, half of the cost of maintaining the tank gets charged to average cost and the other half to peaking cost. Additionally, reservoirs are also designed to provide fire flow and therefore a portion of the costs are allocated to fire.
To ensure that the costs are being appropriately allocated to customer classes, we first need to identify these classes. Typical classes are single family residential, multi-family residential, industrial and commercial. In the City, multi-family and commercial/industrial use patterns are similar and are lumped into a single class called Other Standard Customers. The City provides discounts to Low-income, senior, and disabled customers from non-rate revenues.
To determine the average cost and the peak cost applied to the customer classes, we identify the average and peak use of these classes so that the average and peak costs are appropriately shared. In addition, the customer service costs are shared equally amongst all customers since it costs the same to read each meter and bill each customer. Larger meters impose greater demands on the system and the system must be designed to meet those demands, and therefore meter costs are based on the amount of flow that can pass through a meter
The next step is to design rates. The meter costs and the customer costs represent the meter charge for each account. The variable water rate for each unit of water used is composed of three elements:
cost of supply; cost to provide service under average conditions, which is the same for all customers; and peaking costs.
To determine the supply cost, we take the lowest cost supply, which is the local water produced from wells and allocate it equally among all accounts so that each account receives the same amount of this water. This allocation defines the total low-cost water to each class. The next lowest cost water is the desalter water is allocated in the same manner. The remaining water required by each class is the water purchased from Metropolitan Water District. For the SFR class we define the tiers: the first tier provides the basic indoor usage, the second tier defines the average usage for the class, and any usage above that falls in the third tier. The supply is then allocated to each tier with the lowest costs to Tier 1, the next low-cost supply to Tier 2, and the remaining cost supply to Tier 3. There are two tiers in the Other Standard Customers class, and since most customers in this class have higher use, the allocation in Tier 1 is higher.
The cost of average delivery represents the second component and is the same for all classes and tiers. The third component takes the peaking characteristic, which represents the maximum usage of the class compared to the class average, and spreads the peaking costs proportionately. For the SFR class, each tier is treated as a separate class with its own peaking factor.
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3.9. Bill Impacts
Table 3-35 below shows the impacts of an average SFR customer with a 3/4-inch meter using an average 11 hcf of water monthly, assuming no pumping service charge. For comparison purposes, the impacts on very low-end to very high-end users are also shown. All Other Standard customer impacts are shown at a variety of usage levels using a 1” meter in Table 3-36. Table 3-37 shows Low Income Senior & Disabled customer impacts using a 1” meter and the same usage levels as SFR.
Due to rounding in the calculations, some values may not add to the penny.
Table 3-35: SFR Monthly Rate Impacts
Single Family Monthly Bill
Impacts, 3/4" meter Usage (ccf)
Current
Monthly
Bill
Proposed
Monthly
Bill
Difference
($)
Difference
(%)
Low Use 4 $21.14 $21.68 $0.54 2.6%
Below Average Use 7 $31.39 $32.33 $0.94 3.0%
Typical Use 11 $54.45 $54.21 -$0.24 -0.4%
High Use 17 $95.13 $96.98 $1.85 1.9%
Very High Use 25 $150.99 $156.66 $5.67 3.8%
Table 3-36: All Other Standard Customer Monthly Rate Impacts All Other Standard Customers
Monthly Bill Impacts, 1" meter
Usage
(ccf)
Current
Monthly
Bill
Proposed
Monthly
Bill
Difference
($)
Difference
(%)
Low Use 10 $49.61 $51.47 $1.86 3.7%
Small Apartment Use 25 $132.85 $142.07 $9.22 6.9%
Typical Use 50 $271.57 $293.07 $21.50 7.9%
High Use 100 $549.02 $595.07 $46.05 8.4%
Very High Use 500 $2,768.62 $3,011.07 $242.45 8.8%
Table 3-37: Low Income Senior & Disabled Customer Monthly Rate Impacts Low Income Senior & Disabled
Monthly Bill Impacts, 3/4" meter
Usage
(ccf)
Current
Monthly
Bill
Proposed
Monthly
Bill
Difference
($)
Difference
(%)
Low Use 4 $19.21 $18.60 -$0.61 -3.2%
Below Average Use 7 $28.01 $26.94 -$1.07 -3.8%
Typical Use 11 $49.16 $47.18 -$1.98 -4.0%
High Use 17 $86.95 $81.34 -$5.61 -6.4%
Very High Use 25 $138.95 $127.90 -$11.05 -8.0%
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3.10. Monthly Bill Comparison
Figure 3-6 shows a comparison of the City’s current and FY 2025 proposed single family bills to neighboring water utilities assuming a ¾-inch water meter and average monthly water usage (11 hcf). A City customer’s bill in 2025 is represented by the green bars and those of other utilities by the blue bars. While such comparisons can provide insights into a water utility’s pricing policies, please also note that differences in water rates and bills are heavily influenced by factors such as geographic location, customer usage characteristics, source of water supply, water treatment, grant funding, and the age of system infrastructure
Figure 3-6: Monthly Bill Comparison