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Why I do not support the Water Rates:

Most of my comments on the water and sewer rates are on the audio recordings of these meetings, but the following is an outline of some my thoughts from those meetings.

It was I that asked that a study be done by the city 2 years ago because no one knew what our fixed costs were. I totally support the need for a rate analysis on the water and sewer departments to determine what our recovery costs or rate of return is for the system. The rate of return attempts to recover sufficient funds to replace the assets at some point in the future. Without an appropriate rate of return, customers today are being subsidized by future customers. Finding the Cost of service is critical in understanding your total cost. You must also determine the rate design process, and justify the costs charged to customers. I have no problems in supporting rate adjustments to recover costs of the system if they are justified and the fees are issued based on consumption fairness. What I am not supporting at this time, is the inaccurate rate design process that was used to justify the costs to charge customers. The issue’s I have with the culinary rate study that was presented to the city council are:

1- I disagree on the cost based methods or the hybrid form used to determine the revenue requirements of the water system. There are two methods used by the industry to determine rates: one is the Cash-based method which almost every city uses because it is easy for elected officials and the public to follow. It attempts to match cash inflows and outflows on a yearly basis, but it is not generally accepted by courts if the rates are challenged. The second method is the Utility-based method. This method is used through the industry by utility companies because it leads to more stable and consistent rate adjustments, and typically leads to a more financially stable and healthy utility company. This is a system where the rate of return is used to identify the level of operating income needed.

2- The method used by the company that the city hired out to determine the rates for the city, tends to result in unstable rates, and leads to large rate adjustments in the future. It also conceals potential rate problems and revenue deficiencies because it is based on cash inflows and outflows. This is the existing problem with the old rate system the city was using for water rates.

3- I feel that the base fee for the fixed administrative cost was manipulated to reflect a targeted amount of revenue stream. The fee did not reflect the true hard fixed costs of the administrative fee that need to be charged to the consumer. The administrative costs should be designed to recover distribution costs that do not vary; unfortunately, this was not the way it was set up.

4- The water usage fee of per 1000 gallons, as it is now, is being used to subsidize some of the fixed administrative costs. You need to decouple the administrative fixed cost from the variable usage costs. The recovery costs for usage should NOT be producing the major portion of the revenues to support the system. If the revenues for usage are producing the majority of your recovery cost, then the system is set up to fail. This was the problem the city faced a few years ago when the city was short over $500,000 in their water funds because the system was set up on usage for revenues to support the system, and when the usage went down, so did the revenues. We were then unable to pay for the systems recovery costs.

Some of My thoughts on the Secondary Irrigation Rates:

I agree that the secondary water fee should be adjusted to the size of the lot as the city has put in place because it accounts for the potential usage of the water by the consumer. The city has different lot size fees that account for the potential amount of water usage by the consumer, but the city has not accounted for the different scenarios of water users.

One such case is for those that have given their water share, worth thousands of dollars, to the city without charge. However, the city has not adjusted their water fee as they should have, taking into account the free water share that these individuals have given to the city. These citizens who gave their water shares to the city for free are now unfairly being charged for their water, when they should only be charged a fixed Operation and Administration cost for using the system and not for the water usage amount.

I asked for and had hoped that city council would have taken the time to bring in someone who had actual hands-on experience in running a secondary irrigation system. Then this person could have shared their professional experiences with the council concerning how to accurately run an irrigation system, how to fairly adjust fees for different scenarios for the water users, and how to develop a long term water usage strategic plan for the consumers and the city. Unfortunately, none of this critical information was available to us because the Rate Analysis “Expert” that was chosen had no experience in this field. We needed to hire someone who has run a water system before, someone who could educate us and help us make an intelligent and accurate assessment of what to do, as none of the council members have this necessary background or experience to make such an important decision.

BY ALAN MCDONALD   04/22/2013

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