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HomeMy WebLinkAboutCOUNCIL - AGENDA ITEM - 05/10/2011 - UTILITIES RATE PHILOSOPHY DATE: May 10, 2011 STAFF: Brian Janonis Patty Bigner WORK SESSION ITEM CONSULTANTS: Joe Mancinelli, FORT COLLINS CITY COUNCIL Scott Burnham-R.W. Beck, Inc. Lynn Adams-Levidy Adams Consulting Pre-taped staff presentation: available at fcgov.com/clerk/agendas.php SUBJECT FOR DISCUSSION Utilities Rate Philosophy. EXECUTIVE SUMMARY Fort Collins Utilities staff has begun the process of updating financial plans to align with City Council policy,the needs of internal and external customers,and community partners. The next step is development of a philosophy that serves as a platform for strategic alignment for the four utilities regarding the development of future rates. At the same time,development of a proposal for electric rate options is also being discussed and will be based on the draft philosophy and rate design principles. Discussion of the electric rate options proposal will be discussed at a second work session on June 14, 2011. GENERAL DIRECTION SOUGHT AND SPECIFIC QUESTIONS TO BE ANSWERED Staff developed the Financial Strategy and Rate Design Philosophy as a means of aligning City Council policy with the development of future rates. 1. In general,does this philosophy successfully align with City Council policy and objectives? 2. What revisions or additions are suggested? 3. Council support use of the Financial Strategy and Rate Design Philosophy principles and objectives in the design of electric rate options? BACKGROUND / DISCUSSION In order to develop financial strategy for the coming years,Utilities has begun a discussion of how best to align City Council policy, City Charter and Code, Plan Fort Collins principles and existing Utilities master plans and other strategic plans. This financial strategy will assist policy makers and May 10, 2011 Page 2 managers in assuring operations are sustainable and revenue is sufficient to provide funding for utilities infrastructure in the decades ahead. Following a lengthy period of growth, the Utilities are now dealing with the transition from that growth period to serving more infill and redevelopment,as well as planning for the assessment and maintenance of its aging infrastructure. Light and Power,the City's electric utility,has also received substantial federal grants for Advanced Metering Infrastructure (AMI) and smart grid implementation. The AMI project for water and electric meters is expected to be completed by 2013. Platte River Power Authority (PRPA) is also expected to adopt a seasonal rate structure beginning in 2012. In preparation for design of rate options best suited to this new environment, impacts of the various rate designs are being reviewed for presentation to City Council and the community. The Rate Design Philosophy will reflect the long-held values of the City for affordable and equitable rates and assist in determining which option provides the most benefit. The first section of the Financial Strategy and Rate Design Philosophy stresses the importance of alignment between financial strategy and rate design with the existing plans, policies and goals which provide overarching strategic direction for the Utilities. Other factors include City values such as outstanding service,stewardship,and safety,and Utilities risk categories,such as risk related to customer satisfaction, affordability, and revenue volatility. As mentioned in the philosophy document, a key challenge is reaching an outcome that will achieve the Utilities mission and strategic direction while ensuring long-term financial integrity. The philosophy proposes eight central principles that apply across the four utilities. Over the years, many of these concepts have served as the foundation for rate design,but have not been documented as guiding principles. Finally, staff developed rate objectives that reflect changes and requirements of the four utility industries. The Financial Strategy and Rate Design Philosophy has been discussed with the City's Electric and Water Board. Staff received general support for the document and incorporated comments and suggestions in the current draft. ATTACHMENTS I. Financial Strategy and Rate Design Philosophy 2. Excerpt from Unapproved Electric Board Minutes, April 6, 2011 3. Excerpt from Unapproved Water Board Minutes, April 21, 2011 4. Powerpoint presentation ATTACHMENT 1 Draft Fort Collins Utilities Financial Strategy and Rate Design Philosophy April 29 2011 Fort Collins Utilities Table of Contents Financial Strategy and Rate Design Philosophy.........................................................I Introduction and Background................................................................................I Values....................................................................................................................2 Financial Strategy and Rates Alignment with Strategic Direction........................3 CityCharter/City Code..............................................................................5 Plan Fort Collins - City Finance Philosophy......................................:........6 City Climate Action Goals...........................................................................6 EnergyPolicy........................................................:......................................7 Water Supply and Demand Management Policy 2003 (currently beingupdated)..............................................................................................7 Drinking Water Quality Policy 2003 ...........................................................8 Plan Fort Collins - Water.............................................................................8 Plan Fort Collins - Stormwater....................................................................8 Plan Fort Collins - Wastewater....................................................................9 Alignment of Rate Structures with Strategic Objectives.......................................9 Financial Strategy and Rate Design Principles .....................................................9 Rate Objectives: Utilities Services......................................................................19 Light & Power............................................................................................19 Water, Wastewater, and Stormwater..........................................................19 List of Figures Figure 1: Strategic Alignment and Integration—City and Utilities................................1 Figure 2: Financial Strategy Alignment with Existing Plans, Policies, Procedures ............................................................................................................4 Figure 3: City Charter&Applicable Resolutions Provide Direction to Utility Financial Strategy and Rate Philosophy...............................................................5 Figure 4: Fort Collins Utilities Economic Principles....................................................11 Fort Collins An SAIC Company Utilities Financial Strategy and Rate Design Philosophy Introduction and Background High performing utilities are guided by their vision, mission and strategic objectives; these objectives provide a framework for developing the utility's financial strategy and rate design philosophy. Grounding the current efforts in the Plan Fort Collins direction, supporting policies, the Utilities for the 21" Century (U21 C) purpose and the enduring values held by the organization provides the basis for developing a long- term philosophy for approaching financial continuity and rates design. This interrelationship is shown on Figure 1 below. Plan Fort Collins Vision &-Policy %tn,8`61�e'g' Water Climate. .�° Wastewater Stormwater € o- fn n UTILITIES FOR THE 215T CENTURY cap sPrrrin5' c6` e ;„„ environn'e � 'mPa¢t tyh.z mmcanity leadership by reducing 4 �or�etY �rte benefiting,customers-Ahe,economy an c pcw �+ Culture Issue Stakeholder Issue Triple Bottom Line= Workforce Issue Acultural Stakeholders must <<; "Issue The Utilities workforce transformation that be educated and Business practices should be empowered, embeds sustainability motivated to support must. needs that engaged,and supported needs to be achieved sustainability efforts. balance economic, to achieve throughout the social,and sustainability goals. organization. GOAL: environmental ,Demonstrated... : ,._considerations. ,GOAL:. " --.GOAL: - community support for Provide clear' Employees understand I sustainability efforts ' GOAL: . expectations,challenge" sustainability and Business practices are employees to be p I '..involved'and- rovidea -- Integrate sustainable developedland .? practices into their operationaliied to be safe environment.for ' work and home. creative thinking. _.-. _ consistent with Tnple '.Bottom Line. Organizational Development ftAlignment v�3•o a�a�'�v`� '' � ..��'�� :La da": Stakeholder?Outreach and Engagement 1 - ----- --- -- -- Outstanding Service Innovation&.Creativity Respect Integrity Collaborati --- Figure 1: Strategic Alignment and Integration—City and Utilities April 29 2011 1 Fort Collins Utilities Financial Strategy and Rate Design Philosophy This white paper describes how the Utilities' vision and strategic objectives are related to financial strategy and outlines the rate design philosophy. This philosophy outlines enduring principles to guide both broad financial strategy and specific rate development across utility sectors and over time. In 2007, Fort Collins Utilities took decisive action to become a leader in sustainability; this both reflected the organization's long-standing stewardship mission and reflected the desire of the city administration and, most importantly, the majority of the citizen/customers that the utility serves. The U21 C initiative was launched and has become the unifying direction behind many of the Utilities' decisions during the past three years. The U21 C purpose statement below rightfully forms the foundation for the various other organizational initiatives underway. Inspiring community leadership by reducing environmental impact while benefiting customers, the economy, and society. For the Utilities, the unifying role of the U21 C purpose and the related programs is illustrated conceptually in Figure 1. This mission must now be further supported by a financial strategy and rate design that is consistent as well. In fact, the commercial relationship with customers, as expressed in the monthly service bill, is the single most important, regular communication with customers and serves as the most obvious expression of financial and rate design philosophy. Getting this right — by starting with definition of an enduring philosophy—reaps many rewards. Values Although it can be argued that values are important for all organizations, this is particularly true for municipal utilities and for Fort Collins Utilities specifically as it has been a values-led organization for its entire history. These values, shared by the City of Fort Collins organization, form the basis for engaging stakeholders consistently and confidently in an honest, forthright, ethical, and authentic manner. As noted in the diagram above, the core values are as follows: • Outstanding Service ■ Innovation& Creativity ■ Respect ■ Integrity ■ Collaboration & Teamwork ■ Initiative ■ Stewardship ■ Safety In addition to the direction articulated in the U21C mission statement, Fort Collins Utilities has a comprehensive Sustainability Plan and issues annual reports to the community that are compliant with Global Reporting Initiative (GRI) protocols. This April 29,2011 2 Fort Collins Utilities Financial Strategy and Rate Design Philosophy underscores the Utilities' strong commitment to this fundamental direction. The most recent sustainability report is available at: http://www.fcgov.com/utilities/img/site_Specific/uploads/2009_GRI_Sustainability_Report.pdf Utilities Risk As an operating entity, Utilities faces a variety of risks on a daily basis. The scope of this document does not provide for an exhaustive review of these risks or the risk management approaches currently employed by Utilities. However, broad risk categories, as preliminarily defined by the Utilities management team, include Operational, Financial, Customer Satisfaction, Affordability, Political and Revenue Volatility. A key risk management tool for the Utilities is its retail rate structure. Since Utilities is a municipal utility, all costs ultimately must be borne by the ratepayer through the retail rate structure. However, in the short run, different rate designs can shift the amount of risk borne by the utility and individual customers. As of the date of this draft report, the Utilities management team is reviewing its risks as they relate to the economic principles, existing rate structures and future rate options under consideration. The Utilities management team is assessing the impact of adhering to each core principle (presented herein) on the various types of risk identified. Further, the importance of each of the core principles will re-evaluated once the risk assessment is complete. As this review is completed, the discussion of risk, and risk management, will be further defined and communicated in this report. Financial Strategy and Rates Alignment with Strategic Direction Utilities' master plans and policy implementation plans are in alignment with Plan Fort Collins. To successfully execute the City's strategies, Utilities must adhere to established financial policies and plans. Each of the four utility services (electric, water, wastewater and stormwater) needs to maintain a rate structure that sends pricing signals to its customers that reflect the values and goals of Plan Fort Collins and U21C. Each utility service must have a business and financial plan and must implement those plans. As noted above, the customer's monthly service bill must be reflective of values that are articulated in the plan. i Figure 2 provides a diagram of how the Utilities Financial Strategy and Rate Philosophy are in alignment with Plan Fort Collins. Plan Fort Collins is a multi- discipline document and process, the latest of which was approved by City Council (Council) on February 15, 2011. The U21C concept as presented in Figure 1, provides an overarching statement for Utilities and supports the myriad projects, goals, objectives and organizational issues faced by Utilities, including Financial Strategy and Rate Design. These are supported by the values of Utilities. Utility planning supports U21 C by addressing the policies, regulations and public input into the process. The Utilities Financial Strategy and Rate Philosophy supports utility planning by focusing on specific strategies and objectives as it relates to specific April 29,2011 3 Fort Collins Utilities Financial Strategy and Rate Design Philosophy financial principles. These principles are communicated to the end user (customer) through specific rate options for each utility service. } an. .,or : Colllns,,,,' -.:U21 C ' �a Policies Regulations it Planning «•,J� Other Input '',Utilities Financial Strategy&S late t' . Philosopk ly ro d ..7„� Rate Options • Electric. • Water • Wastewater • Stormwater Figure 2: Financial Strategy Alignment with Existing Plans, Policies, Procedures The policies and regulations that support Utility Planning are further expanded in Figure 3 below. The City Charter(and applicable City Resolutions) provides the basis for the City Code (regulations) and Council Policy(and other policies as approved by Council). All of these governance structures are incorporated into the Utilities Financial Strategy and Rate Philosophy. April 29,2011 4 Fort Collins Utilities Financial Strategy and Rate Design Philosophy City Charter/ Applicable Resolutions , City Code Council'. iicy < City Finance Utility�Planning s�<, Philosophy Utilities Financial Strategy& Rate r<`Philosophy Figure 3: City Charter&Applicable Resolutions Provide Direction to Utility Financial Strategy and Rate Philosophy The following is a description of several of the specific documents, plans, policies, as they relate to U21C and Plan Fort Collins. These include the City Climate Action Plan, the Energy Policy, the Water Supply and Management Policy, Plan Fort Collins — Stormwater, Plan Fort Collins — Wastewater. Many of the plans and policies are supported by the overall Environmental Principles in Plan Fort Collins as identified. Additionally, as indicated in Figure 3, specific elements of the City Charter / City Code apply to the Utilities, as identified below: City Charter / City Code Section XII-6 of City Charter calls for maintaining the Utilities as a separate enterprise fund, as well as for the Utilities to: ■ Cover cost of operation ■ Make in lieu of tax payments ■ Pay debt service April 29,2011 5 Fort Collins Utilities Financial Strategy and Rate Design Philosophy o Revenue and general obligation ■ Provide working capital for utility operations ■ Provide for renewal/replacement ■ Other purposes for the benefit of ratepayers ■ Other purposes for the betterment of the Utilities The City Code provides for the collection of sales tax by the Electric Utility. Plan Fort Collins - City Finance Philosophy City finance philosophy is founded on three guiding principles, as follows: 1. Sustainability and Triple Bottom Line Plan Fort Collins is an expression of the community's resolve to act sustainably: to systemically, creatively, and thoughtfully utilize environmental, human, and economic resources to meet our present needs and those of future generations without compromising the ecosystems upon which we depend. The City applies the principles of sustainability in its budget, finance and implementation decisions by testing pending actions against the triple bottom line. 2. Long-term Vision Fort Collins has a sustained and successful practice of envisioning bold and complex projects and incrementally implementing those projects, sometimes for decades, until achieved. 3. Budgeting Fort Collins citizens entrust the City with the authority and responsibility to invest hundreds of millions of dollars in taxes, fees and charges to deliver services and provide facilities in a wise, thoughtful and responsive manner. City Council and its staff have responded by implementing the directives of citizens and being exceptional stewards of the public's resources. City Climate Action Goals The Climate Action Plan (2008) provides a blueprint for making progress on Fort Collins' greenhouse gas reduction goals while advancing multiple other City objectives. This is incorporated by Environmental Principle 11 in Plan Fort Collins which is mirrored by the greenhouse gas reduction goals contained within the City's Climate Action Plan. Environmental Principle 11 states: To help engender a more economically efficient, successful, and resilient community, and to reduce the impact of the Fort Collins community on global climate change, the Fort Collins community will reduce greenhouse gas emissions 20%below 2005 levels by 2020 and 80%by 2050. April 29.2011 6 Fort Collins Utilities Financial Strategy and Rate Design Philosophy Energy Policy \ Vision 2050: Ensure highly reliable, competitive, carbon neutral electricity supplies, managed in a sustainable, innovative, responsible and efficient manner for the Fort Collins Community. ■ Goals o Provide highly reliable electric service 0 5% Peak Demand Reduction by 2015 o Support GHG reduction goal ■ 20%by 2020; 80%by 2050 (below 2005) o Energy efficiency savings of 1.5% annually o Enhance local economic health o Work with PRPA and Member Cities to further energy.goals Water Supply and Demand Management Policy 2003 (currently being updated) The Water Supply and Demand Management Policy adopted in 2003 called for providing a sustainable and integrated approach to providing the water supply and managing demand as follows: ■ Assure adequate and reliable supply of water for beneficial use ■ Manage level of demand and efficient use of scarce and valuable resource ■ Demand Management ■ Water supply for municipal use ■ Water supply shortage response plan ■ Use of surplus raw water ■ Regional cooperation ■ Raw water quality ■ Stream flow and ecosystem protection ■ Recreational/aesthetic flows ■ Goals o 185 gallons per capita per day (gpcd) by 2003; achieved 155gpcd (2010) o Anticipated Goal: 140gpcd o Education programs: continuous, comprehensive, visible o Rate structures (incentive for efficient use) April 29,2011 7 Fort Collins Utilities Financial Strategy and Rate Design Philosophy to Incentive programs (fixtures; landscape) o Regulatory measures (land use code) o Operational measures (leak detection) Drinking Water Quality Policy 2003 The Drinking Water Quality Policy adopted in 2003 indicated that the City's water system was established to assure the effective delivery of services vital to the health and well being of the community. The goals stated are to provide water services that meet or exceed customer expectations for quality, quantity and reliability; protect and maintain high water quality; plan, build and operate City's water facilities to assure safe, reliable, and cost-effective service to customers. These goals will be achieved through: ■ Effective management • Proactive Monitoring and Testing ■ Protecting, Developing, and Preserving Water Resources ■ Advancing Treatment Technology and Operations ■ Operating and Maintaining the Water Distribution System ■ Assuring the Quality of Water Service ■ Coordinating Drinking Water and Wastewater Treatment Management • Cooperating with Other Water Providers and Users ■ Annual Reporting Plan Fort Collins - Water Plan Fort Collins provides direction for the water utility, including Environmental Principle 21 which states: Drinking water treated by the City's Water Utility will meet or exceed customer expectations for quality, quantity, and reliability. Water conservation will be strongly encouraged. Plan Fort Collins - Stormwater Several principles outlined in Plan Fort Collins provide direction for the stormwater utility, including the following environmental principles: Environmental Principle 18 states: The City will minimize potentially hazardous conditions associated with flooding, recognize and manage for the preservation of floodplain values, adhere to all City mandated codes,policies, and goals, and comply with all State and Federally mandated laws and regulations related to the management of activities in flood prone areas. April 29,2011 8 Fort Collins Utilities Financial Strategy and Rate Design Philosophy Environmental Principle 19 states: The City will pursue opportunities to protect and restore the natural function of the community's urban watersheds and streams, as a key component of minimizing flood risk, reducing urban runoff pollution,and improving the ecological health of urban streams. Environmental Principle 20 states: The City will develop an integrated stormwater management program that addresses the impacts of urbanization on the City's urban watershed. As part of that program, the City will implement requirements and strategies for multi-functional stormwater facilities that support density goals for development and redevelopment at a sub-watershed level. In alignment with these principles, Utilities is underway on two elements: ■ Master Plan Update (complete late 2012) ■ Repurposing Plan Fort Collins - Wastewater Plan Fort Collins Environmental Principle 22 states that the City's Wastewater Utility will meet or exceed state and federal water quality standards, treatment practices, and . procedures that ensure applicable regulatory standards are achieved. Alignment of Rate Structures with Strategic Objectives As demonstrated above, Fort Collins Utilities' programs and investments are guided by its mission and strategic direction. A key challenge of this financial strategy development is to achieve an outcome that will help promote and achieve the Utilities' mission and strategic direction while ensuring long-term financial integrity. For the Utilities to achieve these multiple objectives, new and aligned rate structures and rates are needed. Achieving energy efficiency goals is one example. The residential and commercial rate structures must be designed to encourage customers to conserve energy and make investments in energy efficiency. However, such investments could potentially reduce revenue to the utility, as lower energy sales may reduce fixed cost recovery. If the financial strategy and resulting rate design does not promote the overall strategic objectives, the utility may face a greater challenge to maintain its financial stability. If a utility cannot maintain its financial stability, it may have difficulty in achieving many of its goals. Therefore, getting the underlying, long-term financial and rates philosophy right forms the foundation for that alignment with the organization's values. Financial Strategy and Rate Design Principles In order to guide the long-term development of financial strategy and rates, Fort . Collins Utilities is adopting central principles that are intended to stand the test of time. As such, these principles are calibrated with the enduring vision and values of April 29.2011 9 Fort Collins Utilities Financial Strategy and Rate Design Philosophy both the City and the Utilities Service Area. These central principles apply across the four utilities. Financial strategy and rate design will adhere to the following central principles: 1. Comply with Council policy, as well as applicable laws and regulations. 2. Be founded on sound economic principles to ensure long-term financial integrity and support the triple bottom line direction; design rates that ensure an adequate and sustainable revenue stream. 3. Promote the efficient use of resources including providing incentives for conservation by using clear price signals 4. Maintain the high value of utility services 5. Demonstrate fairness and equitability with minimal subsidization while considering low income and other disadvantaged customers. 6. Engage stakeholders with honest transparency by being as simple and understandable as practical in rate design and forthright in communications. 7. Institute change through gradualism. 8. In alignment with Plan Fort Collins,growth pays its own way. In essence, these principles comprise the Utility's financial strategy and rate design philosophy. The principles have been listed in order of priority as identified by the Utilities Executive Team. These central principles will serve as a framework for redesigning rates and will be actively used to test specific rate design approaches and stakeholder communications. The goal will be to achieve consistency between proposed rate structure changes and vision, mission, values and strategic objectives. The financial strategy and rates designed must complement existing strategic direction by aligning with the vision, mission, values and overall strategic direction of the City and Utilities. Rate structures that do not align with strategic objectives can adversely impact initiatives taken by the utility to achieve those objectives and ultimately harm the overall financial stability of the utility (as discussed above). Additionally, misalignment between rates and strategic direction may send contradictory or confusing price signals to customers or negate incentives provided to promote efficiency and conservation and other emerging technologies supported by Utilities. Lastly, lack of consistency with strategic direction would erode trust with both internal and external stakeholders. Fort Collins Utilities will take the following actions to align with its central principles: ■ Develop financial strategy that aligns with strategic direction ■ -Develop rates that allows the Utilities to continue to provide high quality, reliable services supported by excellent customer service ■ Develop rates that support financial strength and integrity ■ Develop rates that promote the efficient use of resources and conservation April 29,2011 10 Fort Collins Utilities Financial Strategy and Rate Design Philosophy ■ Develop key performance indicators to measure success The eight guiding economic principles (encompassing cost of service, financial planning and rate design) are shown on Figure 4. This figure illustrates that financial strategy and rate design must be founded on economic principles while always maintaining alignment with the Utilities' strategic direction. These principles require careful and thoughtful positioning. Therefore, this process can be considered a "balancing act" where all principles must be considered when developing financial strategy and rate design. Plan Fort Collins Utilities for the 21 st Century Comply with City Charter .and Council Policy A w Practice Sound ,. -Iconomic Principles£; 6 Promote the,Efficient: 'Use of Resources Pilai'ntain"High " Value Services Demonstrate Fairness and Equitability 8 Engage Stakeholders with Honest Transparency,& Institute Changes ,F `NThroiagh,Grad`ualisrn h. Growth.Pays =Ifsbwn"Way 4` 1 ll, 4...:.t it, Iff Figure 4: Fort Collins Utilities Economic Principles April 29,2011 1 1 Fort Collins Utilities Financial Strategy and Rate Design Philosophy The eight cost of service, financial strategy and rate design principles are described in more detail below. In order to align actions with principles and be able to measure when a principle is being satisfied, a key performance indicator or indicators will be developed for each. 1. Comply with Council policy, as well as applicable laws and regulations, and existing obligations From a cost of service and rate setting perspective, Fort Collins Utilities must comply with the laws and regulations set by its governing bodies and regulatory entities as well as contractual obligations and financial covenants. Laws and regulations include: ■ City Charter ■ City Financial Policy ■ City Climate Action Goals ■ State Renewable Energy Portfolio Standards • Utilities-specific Policies o Energy o Water o Stormwater o Wastewater The Utilities must meet the requirements set forth in any outstanding bond covenants related to reserve funding levels and debt service coverage. Another significant legal financial obligation is in lieu of tax payments to the General Fund Transfer, which is set by covenant as specified in Section XII-6 of the City Charter, as follows: Section XII-6. Municipal utility rates and finances. The Council shall by ordinance from time to time fix, establish, maintain, and provide for the collection of such rates, fees, or charges for water and electricity, and for other utility services furnished by the city as will produce revenues sufficient to pay the cost of operation and maintenance of the city's utilities in good repair and working order; to pay into the general fund in lieu of taxes on account of the city-owned utilities such amount as may be established by the Council by ordinance; to pay the principal of and interest on all bonds of the city payable from the revenues of the city's utilities; to provide and maintain an adequate working capital fund for the day-to-day business operations of said utilities; to provide and maintain an adequate fund for the replacement of depreciated and obsolete property and for the extension, improvement, enlargement and betterment of said utilities; to pay the interest on and principal of any general obligation bonds issued by the city to extend or improve said utilities.The provisions hereof shall be subject at all times to the performance by the city of all covenants and agreements made by it in connection with the issuance, sale, or delivery of any bonds of the city payable out of the revenues derived from the operation of its utilities, whether such revenue bonds be heretofore or hereafter issued. April 29.2011 12 Fort Collins Utilities Financial Strategy and Rate Design Philosophy _ I All net operating revenues of the city's utilities shall be held within the respective utility's fund and may be expended only for renewals, replacements, extraordinary repairs, extensions, improvements, enlargements and betterments to such utility, or other specific utility purpose determined by the Council to be beneficial to the ratepayers of said utilities. (Res. No. 71-12, 2-I1-71, approved, election 4-6-71; Ord. No. 202, 1986, § 1, Part V, 12- 16-86, approved, election 3-3-87; Ord. No. 203, 1986, § 1, Part N, 12-16-86, approved, election 3-3-87; Ord. No. 159, 1988, 12-20-88, approved, election 3-7-89) Fort Collins Utilities is governed by the Council in the setting of rates and the Council must ultimately approve any changes to retail rate structures. As a member of the Platte River Power Authority (PRPA), the City (and therefore the Utilities) is actively involved in the development of its wholesale power rates. Further, as a member of PRPA, the City has certain financial obligations with regard to the outstanding debt, the current and future operations, and the future capital requirements of the PRPA generating units. As a Utility serving outside City customers, there may be certain Public Utility Commission requirements with which to comply in the rate setting process. Fort Collins Utilities will take the following actions to align with this principle: ■ Continue to conduct public proceedings at the City Council prior to approval of any proposed changes to rate levels or rate structures ■ Establish a revenue requirement and design rates that meet the financial policies of the City as well as all legal commitments and obligations to its creditors and its membership in PRPA 2. Be founded on sound economic principles to ensure long-term financial integrity and support the triple bottom line direction; design rates that ensure an adequate and sustainable revenue stream. The development of rates that ensure long-term fiscal integrity via an adequate and sustainable revenue stream is important to the future of the Utilities. Dynamic market changes and customer usage patterns directly impact the ability,to satisfy this principle and necessitate state of the art approaches. Without financial stability, the Utilities could face severe financial consequences, including the inability to execute its fundamental mission. Practicing sound economic principles is a widely accepted core objective throughout the utility industry. The economic principles of ratemaking include cost of service analysis as a basic standard of fairness and reasonableness, avoidance of undue discrimination, effectiveness in yielding total revenue requirements, revenue stability, consideration of value of service, offering competitive prices, considerations of the impact of rate structures on consumer behavior and efficient use of resources. These ratemaking principles are captured and enumerated in the writings of industry thought leaders such as Alfred Kahn and James Bonbright and have been applied to the ratemaking practice for over 35 years. These principles are also passed in cost of April 29,2011 13 Fort Collins Utilities Financial Strategy and Rate Design Philosophy service and rate making performed by Utilities through courses periodically offered by professional organizations such as the American Water Works Association (AWWA) and the American Public Power Association (APPA). Rates should be designed, to the degree practical, to reflect the actual cost of providing services to different customer types while promoting the efficient use of resources. Utilities are entrusted with a significant portion of the world's natural resources and are thus obligated to support the efficient utilization of those resources. As well, Fort Collins Utilities is entrusted with the financial capital of the community and is obligated to utilize those financial resources efficiently and for the benefit of the customer/rate payer. Rates must be designed to provide the appropriate pricing signals for customers and promote the efficient use of utility assets and natural resources. Moreover, the Utilities has a strategic direction that includes a triple bottom line approach. Using financial strategy and rate design best practices advances the Utilities toward fulfilling its obligations to the economic, social and environmental aspects of the triple bottom line triad. There are a variety of sources of industry protocol, practices and procedures available to guide the sound economic principals in the area of retail utility rate schedules. These include accounting protocols such as those espoused by the Government Accounting Standards Board (GASB) in the Generally Accepted Accounting Principles (GAAP), as well as specific electric utility accounting requirements such as those identified by the Federal Energy Regulatory Commission (FERC). Additionally, there are accepted industry practices identified by regulatory groups such as the National Association of Regulatory Utility Commissioners (NARUC), as well as by industry groups AWWA and APPA as indicated above. However, rates structures designed to promote efficient use of resources tend to reduce overall system load growth and can increase volatility in revenue stream. In order to lessen the negative impacts of growth decline, some utilities are recovering a greater portion of fixed costs through fixed charges. This is in alignment with the objective of preserving the financial strength and integrity of the utility. Fort Collins Utilities will take the following actions to align with this principle: ■ Follow ratemaking best practices and industry standards ■ Set rates at levels that ensure revenue stability ■ Continue to establish customer classes based on similar cost of service characteristics ■ Continue to prepare an unbundled cost of service analysis that identifies the key cost elements of serving each class of service to support rate decisions ■ Design rates that are in alignment with cost of service results and minimize subsidizations ■ Recover a greater portion of fixed costs through fixed charges ■ Set rates at levels that fully recover the utility's revenue requirements April 29.2011 14 Fort Collins Utilities Financial Strategy and Rate Design Philosophy ■ Design rates that pass through adjustments necessary to offset revenue excess or shortage from inaccurate use projections as they recover fixed costs ■ Test ratemaking against the elements of the triple bottom line ■ Utilize financial planning tools to determine most effective use of debt and equity mix for financing capital intensive projects 3. Promote the efficient use of resources including providing incentives for conservation by using clear price signals. Efficiency and conservation programs provide environmental benefits to the community. Rate structures can be developed that promote conservation and consumption patterns that promote the efficient use of resources by sending pricing signals to customers, particularly those customers with high consumption and/or inefficient consumption patterns. However, rates should not be designed to penalize large, but efficient, end users (customers). To encourage conservation, rates may be structured in blocks where the costs increase as consumption rises (i.e., tiered or inclining block rates). Additionally, demand charges and time-of-use pricing structures can be considered as long-term objectives to provide pricing signals to shift consumption to times when it costs less to produce and deliver the resource. Such rate structures empower customers to better manage their consumption and potentially lower their bills. Many other rate structure options are expected to be available when the smart grid/AMI system is in place. Fort Collins Utilities will take the following actions to align with this principle: • Develop rate structures that promote conservation and efficient use of resources by sending clear price signals ■ Ensure adequate cost recovery based on analysis of expected consumption changes influenced by new rate structures and improvements in fixed cost recovery mechanisms ■ Consider new rate structures and future rate development strategies that empower customers to better manage their resource usage and provide improved pricing signals • Continue to aggressively promote efficiency and conservation through existing programs by developing new programs and rate structures ■ Provide pricing signals to customers that promote consumption patterns that support system efficiency and lower costs 4. Maintain the high value of utility services. Fort Collins Utilities recognizes the need to maintain high value utility services for all customers. In some stakeholders' minds, the terms "high value" and "affordable" are synonymous. However, the term affordable is subjective and may at times conflict with the need to raise rates to meet rising costs. Given these economic realities and April 29,2011 15 Fort Collins Utilities Financial Strategy and Rate Design Philosophy the Utilities' strategic objectives, a focus on high value is more appropriate. This can be viewed as providing the right level of quality at the right price. The high value objective can be accomplished through clearly understanding stakeholder needs/perceptions and providing consistent customer education, as well as by phasing-in rate structure changes that promote the most efficient use of resources in the long-term. Fort Collins Utilities will take the following actions to align with this principle: ■ Through stakeholder engagement and market research continue to understand customers' perception of high value and calibrate service offerings to match ■ Communicate value of utility services to customers 5. Demonstrate fairness and equitability with minimal subsidization while considering low income and other disadvantaged customers. While the concept of fairness is subject to interpretation, a cost of service analysis provides the basis for developing fair and equitable rates among different customer types. At the same time, selectively deviating from the strict cost of service results may be deemed necessary to support the strategic objectives of the utility and values and needs of the community. When deviating from strict cost of service, the concept of fairness should be applied to determine how best to distribute those costs among customers, such as the case with accommodations for low income and other disadvantaged groups. Closely associated with this principle is the idea that cross- subsidization should be used only sparingly. Fort Collins Utilities is owned by the community it serves and thus its policies and programs reflect the values and social concerns of that community. The Utilities takes its obligation to provide service to all members of the community seriously, including low-income and disadvantaged customers and has historically offered assistance to income-eligible customers. It is important that these policies continue with the development of new rate structures and that new opportunities for enhancing those services be explored. Fort Collins Utilities will take the following actions to align with this principle: ■ Prepare an unbundled cost of service analysis that identifies the key cost components necessary to serve each customer class ■ Gather feedback from internal and external stakeholders and identify community objectives and needs which may not be cost-based ■ Design rates in alignment with cost of service results and in consideration of community objectives and needs • Provide forms of assistance to low-income and other disadvantaged customers including efficiency programs and bill payment assistance programs 6. Engage stakeholders with honest transparency by being as simple and understandable as practical in rate design and forthright in communications. April 29,2011 16 Fort Collins Utilities Financial Strategy and Rate Design Philosophy Fort Collins Utilities values the trust the community has historically placed in the organization and is committed to disclosing information and soliciting feedback throughout the process. This objective of transparency will help ensure that rates are designed fairly and in accordance with the objectives and needs of the community. Another objective to achieve stakeholder transparency is to develop rates that are as simple and understandable as practical. To be effective, rates and pricing signals, communicated through the utility bill or other communication mechanisms, must be understandable. An obvious statement, but often easier said than done due to increasing complexities and options; this is true across industry sectors (e.g., cell phones, cable TV). Additionally, effective ratemaking needs to send pricing signals that enable customers to respond effectively. The objective of simplicity and understandability is becoming more difficult to achieve as customer choice evolves. Interest in emerging technologies such as smart meters, distributed renewable generation and electric vehicles, and time-of-use/other dynamic pricing options adds an additional level of complexity to customer bills. Fort Collins Utilities will take the following actions to align with this principle: ■ Apply/expand the Utilities' existing public involvement process to solicit feedback on any proposed changes to rate levels and rate structures in an open and transparent manner ■ Employ existing stakeholder engagement groups (e.g., Advisory Panel) comprised of representatives of all customer types and interest groups to provide a forum for dialog on rate issues and solicit feedback ' ■ When appropriate, implement pilot programs to evaluate the potential impacts and unintended consequences of complex rate structures ■ Maintain openness and transparency during the process including the release of rate review information and study results to the general public ■ Adhere to the objectives of"timely, truthful and transparent" communications ■ Continue to hold public proceedings before the City Council to review any proposed changes to rate levels and rate structures ■ Design rates that are practical, clear and effective 7. Accomplish changes in rate structure through gradualism. Phasing-in rate structure changes is known as gradualism and avoids "rate shock." By promoting conservation and efficiency improvements, bills can remain stable and/or change gradually over time even as rates increase thus supporting the objective of delivering high value. In addition, gradualism allows for a "no regrets" approach to each decision and action; this is a sound method for reducing unintended consequences. Such unintended consequences potentially include having to undo actions taken previously with the associated stakeholder confusion and push back. An example of such an unintended consequence would be to institute an electric rate change now (e.g., tiered rates) when April 29,2011 17 Fort Collins Utilities Financial Strategy and Rate Design Philosophy the longer-term strategy may lead to another approach (e.g., time of use pricing). An example of gradualism would be to begin educating customers on the anticipated regulatory changes impacting the discharge of the wastewater utility (specifically the pending regulation for reductions in nutrient loading) with regard to potential cost impacts. Fort Collins Utilities will take the following actions to align with this principle: ■ Continue to aggressively control costs; continually evaluate the efficiency of its operations and assets • Develop a long-term approach that includes incremental rate adjustments to achieve goals ■ Testing pricing signals affect on customer behavior. 8. In alignment with Plan Fort Collins,growth pays its own way. As the phrase implies, as a matter of policy, Fort Collins implements practices that allow for growth to cover the costs incurred for itself. This is a current practice at both the City and Utilities level, so the financial strategy and rates design work needs to align with this principle in both concept and practice. Fort Collins Utilities will take the following actions to align with this principle: ■ Apply/expand the Utilities' existing public involvement process to solicit feedback on any proposed changes to rate levels, rate structures, and fees that are designed to have the costs of the impending action be recovered by those that are receiving the benefit ■ Perform periodic review of existing Plant Investment Fees to determine effectiveness in cost recovery ■ Maintain openness and transparency during the process including the release of rate review information and study results to the general public ■ Adhere to the objectives of"timely, truthful and transparent" communications April 29,2011 1 g Fort Collins Utilities Financial Strategy and Rate Design Philosophy Rate Objectives: Utilities Services For each of the four utilities; specific rate objectives will be developed that are consistent with the utility-wide strategy and reflect the situational needs of that service area. Objectives for rate design for each of the services are outlined below. Light Et Power Objective: Rate design that supports customer options brought about by the changing energy industry while preserving the financial integrity of the utility. Specific principles are as follows: ■ Takes advantage of new technology, such as Smart Meter Fort Collins (SMFC) ■ Allows customers to take advantage of their investment in new technologies (e.g., Plug-in Hybrid Electric Vehicles (PHEV), Home Area Networks (HAN), smart appliances, photo-voltaic (PV) systems, other types of distributed generation) ■ Create meaningful price signals that encourage conservation ■ Create meaningful price signals that encourage efficiency ■ Develop rates in the context of long term asset planning ■ Support social and community values ■ Support high reliability ■ Insure financial stability under prolonged low growth (and negative growth) scenarios ■ Improve fixed cost recovery o Flexible rate structure; decoupling; true up ■ Develop tools that work effectively in a new world o Best practices in financial planning, cost of service and rate design ■ Incorporate robust stakeholder education Water, Wastewater, and Stormwater Objective: Rate design that address asset management and regulatory needs while preserving the financial integrity of the utilities. Specific principles that apply to all three "wet"utilities are as follows: ■ Create meaningful price signals that encourage conservation April 29.2011 19 Fort Collins Utilities Financial Strategy and Rate Design Philosophy ■ Develop rates in the context of long term asset planning to support programmed renewal/replacement of infrastructure ■ Support social and community values ■ Insure financial stability under prolonged low growth (and negative growth) scenarios ■ Develop tools that work effectively in a new world o Best practices in financial planning, cost of service and rate design ■ Incorporate robust stakeholder education ■ Balance fixed and variable cost recovery with cost causation ■ Address capital expansion needs to meet customer service expectations Specific principles that apply to water include: ■ Takes advantage of new technology, such as Smart Meter Fort Collins (SMFC) ■ Increase transparency of water resource development costs and cost allocation ■ Recover costs of regulations Specific principles that apply to wastewater include: ■ Recover Inflow/ Infiltration (1/I) costs ■ Recover costs of regulations ■ Reflect true operational realities of customer use in rate design Specific principles that apply to stormwater include: ■ Recover fees on system-wide/utility-wide basis ■ Balance capital project timing and revenue needs with community priorities and risk tolerance ■ Support community values regarding water quality through comprehensive monitoring programs April 29,2011 20 DRAFTATTACHMENT Excerpt from Unapproved Electric Board Minutes, April 6, 2011 Rate Design Philosophy and Principles (Presentation available upon request) Scott Burnham, R. W. Beck, Inc. and Lynn Adams, Levidy Adams Consulting presented information on philosophy and principles for Utilities' strategic financial services. Once a group of consultants and staff began to look into the topic of rate design, it was decided to study our rate philosophy and principles before going to Council. Strategy: Take a long-term view to prevent making short-term decisions that conflict with long-term goals. Rate design must reflect existing strategic direction, vision, and values. Financial strategy ties to the economic aspect of a Triple Bottom Line approach, and there is a significant stakeholder component. Existing Policies: - Section XII-6 of City Charter: The City Charter allows the Electric Utility to recover its costs. - City Finance Philosophy: Sustainability and Triple Bottom Line; long-term vision; budgeting. "Incrementally implementing projects..." is a fundamental piece to this approach. - Climate Action Goals (also referred to Environmental Principle 11 from Plan Fort Collins): It's important to recognize there are two separate goals. - Energy Policy: Enhance local economic health Core Principles: 1. Be founded on sound economic principles to ensure long-term financial integrity and support the Triple Bottom Line direction; design rates that ensure an adequate and sustainable revenue stream. 2. Demonstrate fairness and equitability with minimal subsidization while considering low-income and other disadvantaged customers. 3. Promote efficient use of resources including providing incentives for conservation by using clear price signals. 4. Maintain the high value of utility services. 5. Institute change in rate structure through gradualism. 6. Engage stakeholders with honest transparency by being as simple and understandable as practical in rate design and forthright in communications. (A biannual customer satisfaction survey has been used; the team is considering other mechanisms to stay current with stakeholders, such as internet studies and other timely, user-friendly tools). 1 7. In alignment with Plan Fort Collins, growth pays its own way. 8. Comply with Council policy, as well as applicable laws and regulations, and existing obligations. Objective: Rate design that supports customer options brought about by the changing energy industry while preserving the financial integrity of the utility. The team will return to the May 4 meeting to review specific rate design options. The Philosophy and Principles of Rate Design go to Council at the May 10 work session; Rate Design Options follow on June 14. Board discussion: Is high reliability based on customers'or Utilities'definition? Utilities have internal goals on reliability (typically very high); whereas customers'expectations may be lower and they may not want to pay for the additional costs associated with achieving very high reliability. How will rates account for deterioration of the system/physical plant in such a way that cost can be anticipated over the long-term? Asset management takes into account the life cycle and replacement costs of our facilities. The Electric Utility will be undergoing very comprehensive studies as to future costs; we do not have a good number right now. Currently, $8 million per year is budgeted for renewal and replacements, and we anticipate the confirmed figure will be higher. The philosophical intent is to gradually build a reserve with rate increases rather than steep increases. What is the life cycle projection of our initial cable? Thirty years ago, it was estimated to have another 10-15 years, depending on conditions. Would cables be replaced proactively prior to failure? The Electric Utility will begin using diagnostics to give a clearer picture of remaining life, and conditions are also assessed based on similar cable failures. How much is the City paying our consultants? We appropriate for a project each year, which can last multiple years. The proposal addresses a variety of financial strategies (initial work and rate design for all four utilities) at$135,000. How can a rate be expected to accomplish all of this, yet keep the Utility solvent? Some principles are contradictory to others, which compels us to look at the rate structure. It's obvious to detect interesting, competing goals (reducing carbon footprint and charging batteries for a coal plant), resulting in a lot of competition among the guiding principles. If a rate could be designed to encourage customers to charge electric cars at 2 a.m., it's not perfect, but the rate design is supported by these principles. The team 2 envisioned developing the rate options and phasing in various rate options over time, and noting which principles each one supports. Board members discussed weighting the objectives. This is based on an "as is" scenario currently. As PRPA changes their rate structure, coordination would be necessary. Mr. Janonis noted this has been discussed at the PRPA Board meetings; there is not consistency across all four partner cities, so it is "unbundled". Each city translates it differently into our own rate form. Board members requested some examples of rate applications that did not work for others in the way they were intended. (Tracked as open item for resolution). With four rate proposals (different for commercial and residential), one risk is that we won't bring in enough revenue to maintain the system. Another risk is we won't generate enough revenue to meet our costs. The impact of making the wrong decision is high and unfavorable. A board member asked about the methods that the team will use to take risks into account and compare each proposal against the risks. The team will make sure Utilities is not in unfavorable financial shape, and end users share the risks and costs. A quantified risk assessment of every option is beyond the scope that R. W. Beck has been asked to do. One core principle is gradualism, which helps mitigate the risk to both the Utility and the customer. If the Utility was buying on the market, it would be subject to drastic fluctuations in the market due to disasters and other market influences. Customer and Employee Relations Manager Patty Bigner asked the Board if they favor having a guiding rate philosophy. The Board confirmed they favor this approach. A board member expressed concern that we're spending money to create the philosophy. The rate structure analysis is needed. Chairperson Wolley suggested adding a "risk aversion" category, similar to the other principles—an option to address this without going into a full risk assessment. Ms. Bigner noted we could clarify the intent to insure sufficient revenue to support the Utility extends well past our tenure. Utilities Rates Analyst Bill Switzer also noted many options exist to buffer risk. The board would like an intelligent discussion of why each was chosen over the others (referring to rate options). (Tracked as open item for resolution). Automated Metering Infrastructure (AMI)provides the ability to do time-of-use rates. Several members of Council pushed for a rate structure change before AMI is fully installed. Would we consider going with a rate structure change before AMI, and will we get a clear picture of the cost (to the Utility) if we think another one is coming in a year or two? If we go to time-of-use rate, can we collect information or would load profiles be 3 sufficient to figure it out? We do not have this data on the residential side, so we will have to gather a year's worth of data in order to design time-of-use rates around our customer load. Risk should also consider reliability thresholds. A board member expressed support for the investment of time and funds to develop the guiding principles and philosophy. Ms. Bigner noted that strategic alignment is part of the reason for the front end of this document. Utilities' world is complex and has many inputs and expectations to bring everything into alignment. Mr. Janonis noted that originally, Council wanted to go to tiered rates, and Utilities took a step back to look at the spectrum of options. Some elements are specific to the Electric Utility and have been brought to this Board. The Water Board will hear both the common elements and those specific to Water, Wastewater and Stormwater utilities. Motion: Board Member Graham moved that the Electric Board recommend that the City Council consider approval of the proposed Financial Strategy and Rate Design Philosophy, consistent with staffs recommendation. Vice Chairperson DeCourcey seconded the motion. There was no further discussion on the motion. Vote on the motion: It passed unanimously. 4 ATTACHMENT 3 DRAFT Excerpt from Unapproved Water Board Minutes, April 21, 2011 Rate Design Philosophy and Principles (Presentation available upon request) Customer and Employee Relations Manager Patty Bigner introduced the R. W. Beck, Inc. consulting team who has been retained to develop strategic financial principles to support rate design. The purpose of this work is to develop understanding of how existing policies and strategies align with core principles to support future rate changes. The team includes Lynn Adams, Levidy Adams Consulting, and Scott Burnham and Joseph Mancinelli, R. W. Beck, Inc. The same information was also presented to the Electric Board on Apr. 6, 2011. As a result of an Electric Board suggestion, a weighting matrix has been added. Principles reflect all four utilities, and objectives were shared by service unit or department. Mr. Burnham and Mr. Mancinelli have extensive experience with this type of work all over the country and are in tune with financial strategies best practices. Ms. Adams confirmed the Utility is doing this the right way in basing it on a sound, long-term strategy. Without the guidance of a long-term strategy, rate fluctuations can be confusing to customers. The types of risks utilities are typically subjected to are identified in the philosophy and principles document. A strategy for the Utility has been formed by Utilities Executive Director Brian Janonis from two key drivers: Plan Fort Collins' Vision and Policy and the Utilities for the 21 st Century initiative. Economic principles reflect a "bottom up" approach (cost of service, financial planning, and rate design) to support strategic alignment direction from the key drivers. Existing policies pertaining to the wet utilities (water, wastewater, and stormwater) include: - Section XII-6 of City Charter: Maintains Utilities as separate enterprise funds. - City Finance Philosophy: Sustainability and Triple Bottom Line; long-term vision and budgeting. - Climate Action Plan (2008) Goals: Blueprint for making progress in reducing greenhouse gas emissions. - Water Supply and Demand (2003) Policy: Currently being updated. Ties directly to rates in the area of rate incentives for efficient use. - Drinking Water Quality 2003 Policy. Recommendations: An unbundled cost of service analysis is recommended to identify key cost components. (Note: This does not mean an unbundled rate structure is recommended). Base more of the Utilities' fixed costs on fixed charges to stabilize the revenue stream. - Make use of the concept of"gradualism". 1 Rate design can become complicated to send the price signal. There seems to be a contradiction between sending the price signal, yet keeping the design simple and understandable. Board discussion: How do the principles affect rate-setting and how much weight do they carry? Principles are approved by Council; then Council may want to set a rate that's not in line with the principles. Future Councils will have the prerogative to adopt a different direction, but the principles and philosophy document provides an important guideline and structure around the decision-making process. The document refers to "sound economic/financial integrity". What does financial integrity mean? Are bonds a part of the financial integrity scheme, or is it a "pay as you go" approach? Mr. Mancinelli noted the goal to establish the Utility's strength and viability for some time to come; various mixes may be used to that end. Rates reflect our philosophy. High financial integrity can be achieved with either approach—debt or pay as you go. An underlying piece is not defined hereon our philosophy for developing rates. "Growth paying its own way" is a financial philosophy, and there is not discussion here of taking on debt or not. Utilities Executive Director Brian Janonis noted the assumption that we will take on debt. For example, depending on the nutrient regulations, a$60 million plant upgrade may be required. Then this document should reflect an assumption that debt is part of the strategy. It's difficult to comprehend what costs are involved. How can asset management make it more transparent? How far along is the process and how does it fit in with risk and transparency? It will take years to get asset conditions and valuations determined. Is cost incurred because unexpected expenses come up whereas asset management puts us on proactive footing? Yes. Asset management will allow us to determine expiration dates and plan expenses fifty years in advance. The revenue versus conservation priorities seem to contradict each other. It rained a lot the last two summers which hurt revenues. The Utility also shares the importance of conservation with customers. What is the main message then? The Utility budgets based on an average precipitation year, so it's a balancing act between the wet and dry years. Reserve funds are used to supplement revenue in a wet year, and excess revenues received in a dry year are used to replenish the reserves. It would be helpful for the message to state that Utilities likes conservation and will use reserve funds to balance the budget between wet and dry year. The impact of conservation is accounted for in the budget. 2 A few months ago, the Board considered rates, and a former board member encouraged Utilities to pay down debt faster. The Board recommended the rates go up and discussed a fundamental philosophy to have going forward— is debt incurred and how fast should debt be retired if so? This principle should be included rather than a vague concept like 'financial integrity". Regulatory changes cause large, somewhat unexpected expenses. Then other expenses are expected, such as capital expenditures to address undersized stormwater capacity in Old Town. A S60 million plant upgrade for nutrient regulations maybe approached with debt, where other approaches can be used for projects like stormwater mitigation. The Water Conservation Plan, adopted by the State, has not been adopted by City Council. Do we need to seek Council adoption for it to be listed as a policy in these documents? Even though it is funded, by not having the current Council adopt it, a future Council may not recognize it. The Water Conservation Plan is subordinate to the Water Supply and Demand Management Policy, which will be adopted by Council. The Plan does not have specific language about rate structure. Is credit received for having a tiered rate structure as a means of supporting conservation? It is recognized on the demand side. With philosophy and statements in the document, would it tell the consultant team who is working on a rate design that we are building rates in order to fund water conservation programs or is that secondary? The Utility spends hundreds of thousands of dollars on sprinkler audits, conservation programs, etc. Mr. Mancinelli responded that rate structure supports a longer-term financial plan, and a financial plan is designed to cover infrastructure replacement, support financial viability, etc. It takes time to build up reserves. The Utility will have greater ability to build cash and minimize debt if major expenditures in the future can be predicted. A declining block rate structure would be contradictory. When we talk about metrics and measuring success of conservation programs, a number on the electric and water bill provides a measurement. Does the City provide any community information (tracking goals, such as river flows) and does it make sense to share that with the public to know how well we're doing? In other words, what about using the bill to share "big picture" information? Mr. Janonis noted the Utility does a lot to share that information through press releases, annual reports, and other means which describe what we are doing to achieve our conservation goals. Due to great variability with the weather and other impacts, it's best to aggregate the information on an annual basis. Conveying the perception of value to the public is important, such as the high quality of our drinking water. When the Utility has to raise rates, it would be nice if it wasn't approached and described as "due to nutrient regulations", but rather communicate it in a way that makes citizens feel good, such as "we want to keep our river clean". Mr. 3 Janonis noted the Utility can improve our communications and relating steps to outcomes. The same concept applies with "growth pays for itself'. Many citizens feel that growth needs to pay for itself, so the Utility could focus the message there rather than on the few citizens who want to stop growth. A board member questioned how `fair and equitable" in the philosophy applies to the stormwater utility when some citizens who don't receive the services have to pay flood insurance and stormwater fees. Assessment of stormwater fees could be more fair and equitable. Mr. Janonis agreed, and this topic is part of the floodplain regulations discussions underway now. The Board discussed the prioritization of the core principles. Principles are ranked for evaluating rate options. Utilities managers who ranked them struggled to prioritize them, as they are all important, and the order of importance may change for different scenarios. Council will ultimately decide how to balance the decisions around rates. A board member does not see anything in the principles related to the environmental aspect of the Triple Bottom Line (TBL). If the intention is to use a TBL approach, there must be a way to measure environmental meaning. Ms. Adams noted there is a mix of TBL concepts among the list. Is the practice of making payments in lieu of taxes (PILOTS) broadly used by utilities across the country? Also, the City collects sales tax on electricity. Why is sales tax not collected for water or anything else? City Code allows the electric utility to collect sales tax and does not allow collection of tax by the other utilities. Deputy City Attorney Carrie Daggett noted water utilities are much more geared toward public health and safety; sanitation, clean drinking water and stormwater are all vital to public health and safety, and electricity, while also having a public health and safety component, is not as closely tied. Mr. Mancinelli has not encountered a municipal utility that doesn't have some type of PILOT program. The future of the housing industry will bring advancements such as smart houses and infrastructure that old houses don't have, and retrofitting old houses will be a long, difficult process. A board member favors time of use rate structure to avoid the "haves and have notes"syndrome. Mr. Mancinelli responded that these reasons are behind the importance of this exercise, and decisions that impact customers will have to be made. The decisions ahead are not the "status quo"type of decisions of the last one hundred years. Technology is finally coming to the utility business, and a lot of changes are ahead. In order for the pricing structure to aid in demand side management programs, the rates have to go up. The Board also discussed removing numbers from the prioritization list, although item I and 2 were noted as absolutes, and adding "natural" to "efficient use of resources". 4 Staff anticipates proposing a resolution and will take this to the May 10 Council work session. If the policy looks to be in order, at a regular Council meeting in whatever time frame makes sense, the Council could adopt the policy by resolution, and the Water Board will see it in its final form. Board Member Bovee moved that the Water Board recommend that City Council consider approval of the proposed Financial Strategy and Rate Design Philosophy, consistent with staffs recommendation and this Board's recommended changes (noted below). Board Member Phelan seconded the motion. The Board recommends the following changes to the Rate Design Philosophy and Principles document: 1. Adoption of the Water Conservation Plan as a Council-adopted policy. 2. Discussion of"pay as you go" versus debt philosophy. 3. Remove rankings on the prioritization list. 4. Add "natural"to "efficient use of resources". It was noted that Vice Chairperson Balderson (and other board members) favors/may favor ranking the prioritization list. Vote on the motion: It passed unanimously. 5 ATTACHMENT 4 FORT COLLINS CITY COUNCIL WORK SESSION ID ` Utilities Rate Philosophy 1 May 10,2011 A M City of Slide 1 Fort Collins An SAIC Company O 2011 by R.W.Beck,M SAIC Com oaW.AR R19hh Reaemed. Agenda . 4I • Introduction / Purpose • Strategy Development Methodology • Review of Draft Philosophy Document • Strategic Alignment • Existing Policies • Risk Types • Core Principles • Rate Objectives • Light and Power Slide 2 • Water, Wastewater, Stormwater • Next Steps R.W.Beck M SAIC Conan, I 2 1 Introduction / Purpose 'i► Purpose: Develop an understanding of how existing policies and strategy align with core principles to support future rate changes. Slide 3 R.W.Beck.An SAIC ComMN 3 Strategy Development Methodology Philosophy/ Principles Objectives Iby Service Areal Council Endorsement y i Options Council Endorsement Implementation Slide 4 • Customer Involvement •Tool Development • Ancillarx Studies R.W.Beck.An SAIC C.,W I 4 i Utilities Strategy 'i► -0�rt - Y�sion 8 Pol cY - -'• [rn�,.'. Wah Cllmattx • - — �c+ater Stormwater-',_. � ��mesFoe'HE2 rcerrt!�� Strategic Alignment !llpg"Qt"unity Ieader iPhYredua,W em,b^ _ 9s tz While bt efft n4 a twers,the econd^Y Financial strategy and rate design uA:.. °"' philosophy must .vCsmnfu lM atl t btpMNC N911otl bw�owµ r•^k0 v1�r n4MW vpvf Y' W wPPX[. vHlre.Wnle�,.r Nroyoa Rir m,nrumY.11 wn4ammW'u I �. _: � _-- reflect your existing OvewnN S a ueA bGeRnWMtl wWi.bellue~ BeY:anPbkC.e I MaM1tm.a:6T•� strategic direction, vision an -- d values. -- - - -- - � aOryanhabmal WUNopmmt&Afi9uiwnt g� ] , St dk der Qrtrevch and Elgogement r ......:...: Slide 5 ya» W - Ou[nartlkg5em -*.N oonbGeatMrylr' AeWert eneaaly Cu4tw PanbTnn:wark Mtlar 4'b fi5uwar 11-P, 5✓eb r_ R.W.&k,an S<IC Careew 1 5 Alignment with Strategic Direction. 'i► U'Y Charter/ ' APPlicable ReSolutioM Clry Code Ran Fort ColliM z *Go n�cll POlM1ry Y `�'�21C 17nxC;F.. Utllny Banning PhI].,op6Y Cd ' M1 Utiliiles Fir:an<u(-� StrategyB Ra[e Rate Options Slide 6 Electri Water •Wastewater •Stormwanr R.W.Beck,an WC Com w 1 6 3 Existing Policies • Section XII-6 of City Charter • City Finance Philosophy • Climate Action Goals • Energy Policy • Water Policy Slide 7 R.W.Beck,An SAIL Com{erty Existing Policies - City Charter �i► Section XII-6 of City Charter • Maintain the Utilities as a separate enterprise fund • Utilities to: • Cover cost of operation • Make in lieu of tax payments • Pay debt service Revenue and general obligation • Provide working capital for utility operations • Provide for renewal/replacement Slide 8 • The City Code provides for the collection of sales tax by the Electric Utility R.W.Beck,An SAIL fomp 1 B 4 Existing Policies- City Finance City Finance Philosophy is founded on three guiding principles Sustainability and Triple Bottom Line Plan Fort Collins - expression of the community's resolve to act sustainably Long-term Vision History of envisioning complex projects and incrementally achieving them • Budgeting Authority and responsibility to invest money to Slide 9 deliver services and provide facilities Exceptional stewards of the public's resources R.W.Beck,An SAIC ComppM 1 9 Existing Policies - Climate Action Plan (2008) !� Blueprint for Fort Collins' greenhouse gas reduction goals while advancing multiple other City objectives. GHG reduction goals contained within the City's Climate Action Plan Slide 10 R.W.Beck,M SAIC ComM W 1 10 5 Existing Policies - Plan Fort Collins • Environmental. Principle 11 : • Engender economically efficient, successful, and resilient community Reduce impact of the Fort Collins community on global climate change • Reduce GHG emissions 20% below 2005 levels by 2020 and 80% by 2050 Slide 11 R.W.Beck.An SAIC Can , 1 11 Existing Policies - Energy M • Vision 2050: • Ensure highly reliable, competitive, carbon neutral electricity supplies, managed in a sustainable, innovative, responsible and efficient manner for the Fort Collins Community Slide 12 R.W.Beck,An SAIC ComMe I 12 6 Existing Policies - Energy 'i► Goals • Provide highly reliable electric service • Support GHG reduction goal • 20% by 2020 • 80% by 2050 (below 2005) Energy conservation savings of 1 :5% annual • Enhance local economic health • Work with PRPA to further energy goals Slide 13 R.W.&k,An SAIL Com M 13 1� Existing Policies - Water ! Water Supply and Demand Management Policy 2003 (currently being updated) Sustainable and integrated approach to providing the water supply and managing demand: • Assure adequate and reliable supply of water for beneficial use • Manage level of demand and efficient use of scarce and valuable resource • Demand Management • Water supply for municipal use Slide 14 R.W.p k.An SAIL Cm,, I i< 7 Existing Policies - Water Sustainable and integrated approach to providing the water supply and managing demand (continued): • Water supply shortage response plan • Use of surplus raw water • Regional cooperation • Raw water quality • Stream flow and ecosystem protection • Recreational/aesthetic flows Slide 15 R.W.&k.M SAIC CM[W I 15 Existing Policies - Water Water Supply and Demand Management Policy 2003 Goals: ` 185 gallons per capita per day (gpcd) by 2003; achieved 155gpcd (2010) • Anticipated Goal: 140gpcd • Education programs: continuous, comprehensive, visible Rate structures (incentive for efficient use) Incentive programs (fixtures; landscape) Regulatory measures (land use code) Slide 16 . Operational measures (leak detection) R.W.R k.M 541C C.M,,ry 1 16 8 Existing Policies - Water Drinking Water Quality Policy 2003 • City's water system established to assure the effective delivery of services vital to the health and well being of the community. • Goals: . Provide water services that meet or exceed customer expectations for quality, quantity and reliability • Protect and maintain high water quality Plan, build and operate City's water facilities to assure safe, reliable, and cost-effective service to customers. Slide 17 R.W.a k.An SAIC CompW 17 Existing Policies -Water Drinking Water Quality Policy Goals achieved by: Effective management Proactive Monitoring and Testing Protecting, Developing, and Preserving Water Resources Advancing Treatment Technology and Operations Operating and Maintaining the Water Distribution System Assuring the Quality of Water Service • Coordinating Drinking Water and Wastewater Treatment Management Cooperating with Other Water Providers and Users Slide 18 . Annual Reporting R.W.Beck,An SAK Cm W I 1a 9 Existing Policies- Plan Fort Collins ie y • Water • Environmental Principle 21 : • Drinking water will meet or exceed customer expectations for quality, quantity, and reliability. Water conservation will be strongly encouraged. • Wastewater Environmental Principle 22 Meet or exceed state and federal water quality standards, treatment practices, and procedures that ensure applicable regulatory standards are Slide 19 achieved. R.W.Beck.An SAIC C.,p I 19 Existing Policies- Plan Fort Collins • Stormwater Environmental Principle 18: • Minimize potentially hazardous conditions associated with flooding • Recognize and manage for the preservation of floodplain values • Adhere to all City mandated codes, policies, and goals • Comply with all State and Federally mandated laws and regulations related to Slide 20 the management of activities in flood prone areas R.W.Beck An SAIC Compan, 1 20 10 l Existing Policies- Plan Fort Collins Stormwater. Environmental Principle 19: Pursue opportunities to protect and restore the natural function of the community's urban watersheds and streams, as a key component of: —Minimizing flood risk —Reducing urban runoff pollution Slide 21 —Improving the ecological health of urban streams R.W.Beck.An SAIC Cann,ny 1 21 Existing Policies- Plan Fort Collins �o Stormwater Environmental Principle 20: - The City will develop an integrated stormwater management program that addresses the impacts of urbanization on the City's urban watershed Slide 22 R.W.Beck.An SAIC Unn,any 22 I1 Risk Types 'i► >t Risk allocation - "balancing" of core principle Operational • Regulatory • Resource mix Financial • Sufficient Revenues Customer Satisfaction Maintain high levels Affordability Competitive Political Slide 23 Revenue Volatility Constant rate changes R.W.Beck,An WC Cam,W I 23 Philosophy: Core Principles ';► Plan Fort Collins a Utilities for the 21 st Century .ComPly wit&Cur&.a fj t antl;ountll Policy.. $ `.Rocace Spu`tl�"" -YEcorno M k Prin�ipleslf Ptomete e Efficient m t3se of ResDurces wt' .."'Ma main Hpti'9%t 'Va_lue Servl2es..y' Gemo ni3 E E wi PBimeii WtaDlllty� E gage 5[Skehole s, 'Hones[Tmr,sParentr cy.;y I salute Cha gas` Through Gratl nllsmr 'G owth Pays .Its Own W y Slide 24 R.W.Beck,An SAIL CominaY I 24 12 Philosophy: Core Principles 1. Comply with Council policy, applica laws and regulations, Et existing obligations • Comply with the laws and regulations set by governing bodies and regulatory entities • Comply with contractual obligations and financial covenants • Laws and regulations include: • City Charter • City Financial Policy • City Climate Action Goals Slide 25 • State Renewable Energy Portfolio Standards • Utilities-specific Policies R.W.Beck,An SAIC Comyn, 25 Philosophy: Core Principles 2. Be founded on sound economic principles to: ensure long-term financial integrity support the triple bottom line direction design rates that ensure an adequate and sustainable revenue stream Rates should be designed, to the degree practical, to reflect the actual cost of providing Slide 26 services to different customer types while promoting the efficient use of resources R.W.Beck,An SAIC COMWt 1 26 13 Philosophy: Core Principles l 3. Promote the efficient use of resources including providing incentives for conservation by using clear price signals. Slide 27 R.W.&ck,An SAIC COTMM 22 i Philosophy: Core Principles 4. Maintain the high value of utility services. Slide 28 R.W.&k,An SAIC Conµ n, 1 28 14 Philosophy: Core Principles 5. Demonstrate fairness and equitability with minimal subsidization while considering low income and other disadvantaged customers Slide 29 R.W.Beck.An SAIC Com,anY I 29 Philosophy: Core Principles 6. Engage stakeholders with honest transparency by being as simple and understandable as practical in rate design and forthright in communications. Slide 30 R.W.Back.An SAK ComMm I 30 15 Philosophy: Core Principles 7. Institute change in rate structure through gradualism. Slide 31 R.W.Beck,An SAIC Conn,, Bt Philosophy: Core Principles 8. In alignment with Plan Fort Collins, growth pays its own way. Slide 32 A.W.Beck,An SAICCampAny 1 32 16 Rate Objectives- Light and Power Objective: Rate design that supports customer options brought about by the changing energy industry while preserving the financial integrity of the utility. Slide 33 N.W.Beck.<n SFIC Comm. 1 B] Rate Objectives - Light and Power • Takes advantage of new technology, such as Sma Meter Fort Collins (SMFC) • Allows customers to take advantage of their investment in new technologies • Plug-in Hybrid Electric Vehicles (PHEV) • Home Area Networks • Smart appliances • Photo-voltaic (PV) systems/other distributed generation • meaningful price signals that: Encourage conservation • Encourage efficiency Slide 34 • Develop rates in the context of tong term asset planning A.W.B k,An SFIC C..Ma I W 17 Rate Objectives - Light and Power • Support social and community values • Support high reliability • Insure financial stability under p"rolonged low growth scenario • Improve fixed cost recovery • Flexible rate structure; decoupling; true up • Develop tools that work effectively in a new world Best practices in financial planning, cost of service and rate design Slide 35 Incorporate robust stakeholder education N.W.Beck.An SAIC ComMa 1 35 Rate Objectives - Water, Wastewater Et Stormwater !' Objective: Rate design that address asset management and regulatory needs while preserving the financial integrity of the utilities. Slide 36 B.W.Becht.An SAIC Co ,, 1 36 18 Rate Objectives - WET Utilities • Create meaningful price signals that encourage conservation • Develop rates in the context of long term asset planning to support programmed renewal/replacement of infrastructure • Support social and community values • Insure financial stability under prolonged low growth (and negative growth) scenarios Slide 37 R.W.Beck,An SAIC ComMM 1 37 Rate Objectives - WET Utilities • Develop tools that work effectively in a new world • Best practices in financial planning, cost of service and rate design • Incorporate robust stakeholder education • Balance fixed and variable cost recovery with cost causation • Address capital expansion needs to meet Slide 38 customer service expectations R.W.peck,An SAIC Commny 1 38 19 a Rate Objectives - Water f Takes advantage of new technology - Smart Meter Fort Collins (SMFC) Increase transparency of water resource development costs/allocation Recover costs of regulations Slide 39 R.W.Beck.An SAIC Commm 1 M E Rate Objectives - Wastewater !° ` • Recover Inflow / Infiltration (1/1) costs • Recover costs of regulations • Reflect true operational realities of customer use in rate design Slide 40 R.W.Beck,An SAIC COMMW I AR 20 n Rate Objectives - Stormwater { • Recover fees on system-wide / utility- wide basis • Balance capital project timing / revenue needs with community priorities / risk tolerance • Support community values regarding water quality through comprehensive Slide 41 monitoring programs R.W.&k.An SAIC CO W 41 Schedule of Events • Review of Philosophy Document • May 10 (today)- Council Presentation • Review of Specific Electric. Rate Options • June 14 - Council Presentation Slide 42 R.W.&k.An SAIC Comperry 1 42 ^ 21 FORT COLLINS CITY COUNCIL WORK SESSION Tuesday,May 10,2011 a:- Slide 43 A,SAIL Company 02011 by R.W.Beck,Aft MCRMiW1m5 RgM1MRexNv 22