Treatment of water and wastewater (sewerage) is a critical public health activity provided by local governments like the City of Laramie. Providing these services ensures the life, health, and safety of citizens and is integral to securing the current and future economic vitality of our community. State law requires cities that operate water and wastewater systems to finance and operate these enterprises similar to private businesses. Stated simply, the City must charge customers a rate/fee that covers the full cost of the service provided.
Recognizing the need to study the business condition of the water and wastewater utilities, in July 2008 the City of Laramie issued a request for proposals to perform a “Comprehensive Water and Sewer Rate Study.” The City then engaged Red Oak Consulting (Red Oak) to conduct the study, including identification and comparison of the City’s utility performance against industry benchmarks, and facilitation of stakeholder committee meetings.
The purpose of the rate study was to examine the water and wastewater utilities as separate enterprise operations, and to establish the future revenue requirements for each utility. In addition, Red Oak developed a projection of cash flow and debt service coverage for the combined utilities over the ten-year study period.
The City’s rate study included these basic steps:
- Financial Plan - Identify costs and the utility’s revenue requirements
- Performance Evaluation – Compare utility performance with industry benchmarks
- Cost of Service - Allocate costs to types of water and wastewater usage
- Rate Design - Design rates for each type of water and wastewater usage to recover costs from customers
- Stakeholder Review – Involve community stakeholders in the review of the proposed plan
- Council Action – Following a series of work sessions, City Council votes to adopt the rate study recommendations
Each of these steps is described in more detail below.
Together with the City, Red Oak determined the utility’s revenue requirement through examination of annual costs, including both operating expenses and capital costs. Using prudent financial standards and least cost principles, Red Oak determined the revenues required to meet incurred costs. The amount of revenue the utility needs is based on specific guidelines that have been developed for the determination of revenue requirements.
The revenue requirement represents cost commitments of utility payments to bondholders, wages to employees, and other expenditures necessary to operate the utility. The utility financial plan is important because adequate cost recovery is a necessary condition for maintaining a financially viable utility.
In addition to evaluating financial performance, Red Oak evaluated the performance of each utility relative to national averages published by the American Water Works Association (Benchmarking Performance Indicators for Water and Wastewater Utilities: 2007 Annual Survey Data and Analyses Report, Published by American Water Works Association, Edition: 2008 - Softbound - 85 pp., ISBN 1583215735; Catalog No. 20674), including:
- Employee Efficiency
- Customer Accounts Per Employee (water and wastewater)
- MGD Water Delivered Per Employee
- MGD Wastewater Processed Per Employee
- Utility Renewal and Replacement
- Water System Renewal/Replacement Rate (%)
- Wastewater System Renewal/Replacement Rate (%)
The utility has approximately 8,700 accounts served by 18.5 full-time equivalent (FTE) water employees and 12.5 wastewater employees. Part-time and seasonal employees were converted to FTEs based on the total number of compensated hours. Employee time from engineering and construction of new facilities are not included in this benchmark. Water and Wastewater utility accounts per employee are presented graphically in Figure 1 and 2.
Figure 1: Water Utility Accounts per Employee
Figure 2: Wastewater Utility Accounts per Employee
As shown in Figures 1 and 2, the utilities are currently operating with fewer employees than indicated by the median benchmark figures provided by AWWA. To achieve the employee efficiency benchmark median, the City will need to add four water FTEs, and seven wastewater FTEs over the 10-year study period (as reflected in the slope of the Figure 1 and 2 graphs). These projections are summarized in the Financial Plan Tables 2-8 and 3-8 and costs were included in the financial plan.
Benchmarking underscores the lack of personnel for infrastructure needs. Due to the overall condition of Laramie’s pipelines, water emergency repair work typically siphons employees from the wastewater side of operations. This results in two critical issues. First, the number of water employees is inadequate to address what is now the normal work load that includes a projected number of 160 leak repairs for the year. Second, preventive maintenance for either water or wastewater system is inadequate due to lack of manpower.
Programs that would serve to extend the life of these systems cannot be accomplished under current and foreseeable staffing conditions. On the wastewater side, needs include increased sewer cleaning and televising to keep sewers flowing and identify problems such as broken pipes or tree root intrusion. Manhole repair and sealing work is needed to restore the structural integrity of the concrete surfaces and prevent excess water from entering the system. Program improvements are also needed on the water side. Improved fire hydrant maintenance would assure the operability of these critical assets in time of need. Sealing meter vaults would prevent corrosion of piping, valves and meters. Mainline valve exercising would allow pipe segments to be isolated when leaks occur, and replace valves that are too corroded to operate.
The City’s capital improvements plan was based on engineering studies and recommendations received over the past several years, which indicated the need for an aggressive capital replacement program. Red Oak’s analysis showed that the City’s proposed capital plan achieves the utility renewal and replacement benchmark median over the study period. No additional investments in the water transmission and distribution system or sewer collection system were required to reach the benchmark median. These projections are provided in the Financial Plan Tables 2-9 and 3-9, and the costs of renewal and replacement investments were included in the financial plan. Utility Renewal and Replacement rates are presented graphically in Figures 3 and 4
Figure 3: Water Utility Distribution System Investment
Figure 4: Wastewater Utility Collection System Investment
Cost of Service
After revenue requirements have been established, costs are allocated among different types of water or wastewater users, and then rates are designed to reflect the cost of providing water or wastewater service. Cost of service ratemaking designs rates such that users pay through water or wastewater rates the costs they impose on the utility.
The key legal standards that have been set are that rates should be “just and reasonable” and that rates should not be derived on an “arbitrary or capricious” basis. These Supreme Court established principles for review of rates have, in practice, been interpreted in different ways.
One method of establishing “just and reasonable” rates is the standard that rates should not “unduly discriminate” against any customer or customer class. In practice, this “nondiscrimination” principle has been interpreted to mean that no customer or customer class should pay significantly more (or less) than the cost of providing service to that customer or customer class. Customer classes— or homogeneous groups of customers—exhibit similarities in service requirements and demand patterns. Both service characteristics and use patterns affect the cost of service. The implication is that customers with similar service requirements and patterns of use should be placed in the same class of service.
The intent of AWWA rate methods are to impose costs on those responsible for their incurrence, rather than as a reflection of capital-intensive cost structures. Red Oak designed wastewater rates using the City’s existing customer classes. In order to accommodate alternative rate designs (as described below) Red Oak expanded the water customer classes from one class (all customers) to five classes, including:
Cost of service rates were designed for each of these classes, meaning separate rates that reflect each class’s cost of service.
After revenue requirements were established and cost analyses performed, Red Oak designed a water rate structure to achieve the revenue requirement and the appropriate price signal. There are several rate setting guidance documents that present an approach to selecting a rate structure, including the AWWA M1 Principles of Water Rates, Fees, and Charges (2000). The AWWA M1 manual (Chapter 9) sets forth a three step selection process:
- Step 1. Defining Goals and Objectives of the Rate Structure
- Step 2. Evaluating Available Alternatives in Meeting Objectives
- Step 3. Understanding and Communicating Potential Effects on Customers
To maintain eligibility for State grant funding, the City is required to implement an alternative rate structure that encourages water conservation (e.g., tiered water rates). Therefore, new residential increasing-block rates (4 blocks) were established to meet this requirement. All other customer classes have uniform water rates by customer class. The complete rate schedule can be found here.
Designing a rate structure that meets both revenue and cost allocation objectives is not, in general, enough to meet the objectives which are typically defined early on in the ratemaking process. There are other aims and other stakeholders in the ratemaking process. Communicating the potential effects of a rate structure on customers and improving customer understanding of both the rate structure that generates a customer bill and the service paid for by their water bills is increasingly important.
As such, the City convened a broad team including staff, elected officials, and citizens, to work with Red Oak Consulting throughout the process. The City Council Finance Committee comprised of Council Members Shumway, Vitale, McCraken, Guerin, and Hanson participated in meetings with Red Oak. Also assisting in the effort was a Citizen Stakeholder Committee comprised of individuals with various backgrounds, interests, and organizational affiliations. The Stakeholder Committee reviewed all information generated throughout the study period and provided invaluable feedback that was incorporated into the final body of work. Members of the Citizen Stakeholder Committee include Skip Roberts, George Krell, Bob Boysen, Don Smith, Peggy Rounds, Forrest Selmer, John Powell, Daryl Jensen, and Paul Baker.
Each year during budget preparation, the Council carefully and thoroughly reviews the anticipated revenues and expenditures for both water and wastewater. Through detailed analysis by staff and the Red Oak consultant, revenue requirements are determined and an increase proposed to Council.
Through the process of three ordinance readings at Council meetings, plus a public hearing, new rates are implemented as necessary to properly maintain the integrity of the water and wastewater infrastructure.
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Laramie City Manager's Office
P.O. Box C
Laramie, WY 82073