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HomeMy WebLinkAboutCOUNCIL - AGENDA ITEM - 09/30/2014 - COMMERCIAL WATER ALLOTMENTSDATE: STAFF: September 30, 2014 Donnie Dustin, Water Resources Manager Lance Smith, Strategic Financial Planning Manager Carol Webb, Regulation & Govt Affairs Manager WORK SESSION ITEM City Council SUBJECT FOR DISCUSSION Commercial Water Allotments. EXECUTIVE SUMMARY The purpose of this item is to seek direction from City Council for potential changes to commercial water allotments. A water allotment is a maximum amount of water that can be used annually without a surcharge rate being applied. Revenues from the surcharge are used to acquire or develop additional water supplies, but the surcharge can be avoided by providing additional water rights or cash. All commercial customers who have filed a water service permit since 1984 have an annual water allotment, but this only applies to one-third of the approximately 2,600 current commercial customers. Therefore, there is an unintended economic inequity between customers with and without commercial water allotments since those with an allotment pay more for water use over the City’s standard allotment. Staff is recommending this inequity be addressed by establishing an annual allotment for all commercial customers for the 2015 calendar year. GENERAL DIRECTION SOUGHT AND SPECIFIC QUESTIONS TO BE ANSWERED 1. Would City Council like to address the inequity between commercial customers with and without annual water allotments? 2. Is this item ready for formal consideration? 3. If so, which of the options presented would City Council prefer? BACKGROUND / DISCUSSION In 1984, City Code changes were made to establish annual water allotments for new commercial customers. The allotments were established, in part, to assist in planning for adequate water supplies. If customers were using over their allotment, then additional water supplies needed to be acquired. Section 26-149(d) of the Fort Collins Municipal Code and Charter reads: Upon application for a water service permit after March 1, 1984, each applicant who is a nonresidential user shall be assigned an annual allotment of water equal to the greater of the RWR as determined pursuant to this Section and any RWR that was satisfied at the time of application for nonresidential water service. Further, in the event that, pursuant to Subsection (f) below, a nonresidential user submits more raw water than required under the provisions of this Subsection, then the annual allotment shall be determined pursuant to said Subsection (f). When a user uses more water than the annual allotment, as determined by monthly billing records in a given calendar year, a raw water surcharge in the amount prescribed in § 26-129 will be assessed on the volume of water used in excess of the annual allotment. The following table (City Code section 26-129(c)(3)) shows the annual water allotments based on meter size: September 30, 2014 Page 2 Table 1: Standard Commercial Water Allotments Meter Size (inches) Annual Allotment (gallons/year) ¾ 293,270 1 977,550 1½ 1,955,110 2 3,128,170 3 4,692,250 Above 3 325,851 gallons per acre foot RWR For commercial customers who have and exceed their annual water allotment, a substantial surcharge - currently $3.06 per thousand gallons (City Code section 26-129(c)(2)) - is applied to all water consumption for the remainder of the calendar year. In order to avoid this surcharge, the annual allotment can be increased by providing the City with additional water rights or cash-in-lieu of water rights before the end of the calendar year. The distinction between those commercial customers who are subject to the annual allotment and those who are not is based on when the last water service permit with the City was applied for at the commercial premise. If the application was received after March 1, 1984, then the premise is subject to an annual water allotment. The City Code does not distinguish between businesses being in operation at the same premise prior to March 1, 1984 and new businesses that occupy commercial premises which were built before March 1, 1984 even if the business was established or relocated to the premise after that date. A commercial space can be completely remodeled without requiring a water service permit if there is no need to increase the size of the water tap servicing the premise. The result is that an economic inequity exists for newer commercial premises (those built or significantly remodeled after March 1, 1984) over other businesses that occupy premises that have not applied for a water service permit after March 1, 1984. Currently, only one-third of the approximately 2,600 commercial customers have an annual water allotment since they have filed a water service permit since 1984. That is not to say that two-thirds of our customers have been in business since before 1984, but rather only that two-thirds of the commercial customers have not significantly modified their water system so as to need to file for a water service permit. An analysis of water use by commercial customers over the last 5 years (2009-2013) was performed to provide some context to the issue of water use over the standard commercial allotments. The following tables provide a summary of the analysis: Table 2: Number and Percent of Commercial Customers Using Over the Standard Allotments Total Commercial with an without an with an without an Year Customers Allotment Allotment Total Allotment Allotment Total 2009 2,559 193 154 347 8% 6% 14% 2010 2,577 235 193 428 9% 7% 17% 2011 2,597 239 218 457 9% 8% 18% 2012 2,612 285 253 538 11% 10% 21% 2013 2,634 195 184 379 7% 7% 14% AVG 2,596 229 200 430 9% 8% 17% # of Customers using over the Standard Allotments % of Customers using over the Standard Allotments September 30, 2014 Page 3 Table 3: Commercial Customers Use Over the Standard Allotments % of Use over the Standard Total City Commercial with an without an with an without an Allotment to Year Water Use Total Use Allotment Allotment Total Allotment Allotment Total Total City Use 2009 7,391 1,860 90 100 190 5% 5% 10% 3% 2010 7,830 2,020 130 130 260 6% 6% 13% 3% 2011 7,621 2,050 120 130 250 6% 6% 12% 3% 2012 8,757 2,310 170 180 350 7% 8% 15% 4% 2013 7,560 1,860 80 90 170 4% 5% 9% 2% AVG 7,832 2,020 118 126 244 6% 6% 12% 3% All values in million gallons. Commercial use values exclude large contractual use. the Standard Allotment Customersover Use over % of Customers Use the Standard Allotment Table 4: Commercial Customer Surcharge Revenues and Average Costs with an without an with an without an Year Allotment Allotment Total Allotment Allotment Total 2009 $ 275,000 $ 306,000 $ 581,000 $ 1,425 $ 1,987 $ 1,674 2010 $ 398,000 $ 398,000 $ 796,000 $ 1,694 $ 2,062 $ 1,860 2011 $ 367,000 $ 398,000 $ 765,000 $ 1,536 $ 1,826 $ 1,674 2012 $ 520,000 $ 551,000 $ 1,071,000 $ 1,825 $ 2,178 $ 1,991 2013 $ 245,000 $ 276,000 $ 520,000 $ 1,256 $ 1,500 $ 1,372 AVG $ 361,000 $ 385,800 $ 746,600 $ 1,547 $ 1,911 $ 1,714 Actual and Potential Average Cost to Customers Surcharge Revenues for Surcharges Revenues generated from the surcharge for water used in excess of the applicable annual allotment are added to the Utilities Water Rights Reserve so that a sufficient water supply can be established for all customers (more specifically, those using over their allotment). Over the past 30 years the commercial customer base has changed significantly. The need to assess the total demand for water throughout the community has increased as our community has grown. And, the environmental concerns around water consumption have become a much bigger issue for all communities. While the original intent of the grandfathering clause was to not impose additional charges on existing commercial customers at the time of its adoption in 1984, it is necessary to establish an annual allotment for all commercial customers to better facilitate resource planning, to encourage conservation by all commercial customers and, most importantly, to establish economic equity for businesses located throughout the community. Utilities staff has considered several options for addressing the commercial water allotment inequity issue. These options have been discussed internally, as well as with the Water Board. The following is the narrowed list of three options:  Option 1: Apply standard allotments All commercial customers without an allotment would be given the standard allotments listed in Table 1 above based on their meter size. For those customers that currently do not have an allotment, but use over the standard allotment for their meter size, this option would increase their total annual water costs. Based on the 2009-2013 data, this option would increase those customer’s average annual water bills by about $1,900 per year and generate an annual average of $385,000 in revenues to the Water Rights Reserve if those customers continue the same amount of average water use. Although this option would likely be the easiest to implement and administer, it would increase water bills for some without an increase to their water use. Significant outreach would be required for this option, particularly to customers that use over the standard allotments. In discussions with the Water Board, this option was favored and it was suggested that the surcharge rate be phased in over three years to ease the transition for businesses. September 30, 2014 Page 4  Option 2: Apply customer specific allotments All commercial customers without an allotment would be given an allotment that is 110 percent of their highest annual use from 2009-2013, with no less than the standard allotments listed in Table 1 above. This option would likely not increase costs for commercial customers in the first year of having an allotment for those customers that do not currently have an allotment or generate additional revenues to the Water Rights Reserve. The additional 10 percent over the customer’s highest annual use is intended to allow some modest growth without increased costs. A variation for this option would be to adjust the percentage over the highest annual use (from 110 to something else). Staff has also considered only applying 100 percent of the highest annual use. This option would provide allotments to all commercial customers, but since it sets some larger allotments than the standard allotments it does not fully address the economic inequity. Although this option would likely be preferable to existing customers without allotments, it would be more difficult to implement and administer than the other options. Outreach to customers would be more customer specific than Option 1.  Option 3: Apply standard allotments when customers change All commercial customers without an allotment would be given the standard allotments listed in Table 1 above based on their meter size, but only when the customer at that location changes. This option would require no outreach, since existing customers would see no change from current operations and costs. However, the economic inequity among customers would remain for many years (or possibly always). This option would likely be the hardest to implement, since changes would be implemented over a long period. The following table summarizes the impacts, pros and cons and other considerations for the three options: Table 5: Commercial Water Allotments - Change Options and Considerations Option Brief Description Average Annual Cost Increase Pros Cons Customer Outreach 1 Apply Standard Allotments ~$1,900 Provides allotment to all commercial customers now; easiest to administer Will increase water bills for some significantly without increased demand General outreach to all customers with specific outreach to those customers expected to exceed the standard allotments 2 Apply Customer Specific Allotments (110% of 5-year peak annual use) $0 Provides allotment to all commercial customers now; establishes an allotment without increasing costs immediately to businesses Sets varying allotments, which does not fully address economic inequity; more difficult to administer General outreach to all September 30, 2014 Page 5 STAFF RECOMMENDATION In order to avoid an immediate cost increase to commercial customers who have not been subjected to the annual water allotment, staff is recommending Option 2 - applying customer specific allotments. Staff requests that commercial water allotment changes be made before the end of 2014 so they can be applied starting January 1, 2015. WATER BOARD INPUT Utilities staff met with the Water Board on June 19, 2014 to discuss commercial water allotments and potential options for making changes (Attachment 1). The Water Board discussed the issue at length and provided some suggestions that staff considered in the options presented in this work session. Although no action was taken by Water Board on this agenda item, the general consensus was that Option 1 (apply standard allotments) would be most fair for addressing economic inequity among commercial customers and that this option could be phased in over time by increasing the surcharge rate by 33 percent each year for 3 years. A motion from Water Board will be requested prior to City Council consideration of an Ordinance on this issue. ATTACHMENTS 1. Water Board minutes, June 19, 2014 (PDF) 2. Powerpoint presentation (PDF) Excerpt from Approved Water Board Minutes June 19, 2014 Meeting Commercial Water Allotments (Attachments available upon request.) Strategic Financial Planning Manager Lance Smith distributed the Agenda Item Summary, which explains the Excess Water Use Surcharge (known as the “conservation rate” by some people) and several proposed options to address the customer inequity beginning in the 2015 calendar year. One-third of all commercial water customers are subjected to an annual allotment of water and two-thirds are not. The intent is to make the City Council aware of the current situation and propose some options forward if City Council decides to address the inequity. Commercial customers with an allotment who exceed their annual allotment, pay a surcharge of $3.06 per thousand gallons, which is applied to all water consumption for the remainder of the calendar year. It effectively more than doubles their charges for water, as an incentive to conserve water or provide additional raw water to meet their demand. The surcharge was added to the City Code in 1984, and those who didn’t require a water service permit after March 1, 1984 were grandfathered in. In 2012, during the fires and drought, the inequity came to Mr. Smith’s attention and he reviewed three years’ worth of data. Commercial customer totaled 2,641 in 2013. Of those, 35% have an allotment and 65% of customers do not. In 2013 total commercial demand was 1.8 billion gallons of water of which 80 MG was subject to the Excess Water Use Surcharge. If the standard allotment were applied to customers who don’t currently have it, an additional 90 million gallons would have been subjected to the surcharge. The 80 million gallons in excess (for customers with allotment) generated $245,000 in surcharge fees, which went into water reserve fund. Another 90 million gallons were in excess for customers without the allotment. This means the City collected half the money it could have, but the issue is inequity rather than revenue. In 2013 commercial customers who paid the surcharge paid about $1,300 in surcharges. Options to present to Council: (1) Apply Standard Allotment to All Customers, which is the easiest administrative solution, but the least palatable, and would require significant outreach to customers. (2) 110% of Customer’s 3-Year Peak Demand (2011-13), which is more difficult to administer. It applies a customer-specific allotment based on the last three years: choose the highest year, add 10% for growth, by doing that, there would be no cost to the customer in 2015, unless their growth is more than 10%. (3) The Greater of Option 1 and 2: take the greater of the standard allotment, which would not reduce allotment, and ensures all commercial customers have an allotment as least as large as the standard allotment. (4) Phase In Standard Allotment: As new businesses come in, they would be given the standard allotment, but this does not eliminate the inequity. (5) Remove Annual Allotment for All Commercial Customers: elimination of the allotment would also eliminates the opportunity for conservation, which was the original intent. (6) Maintain Status Quo, which doesn’t address the inequity. ATTACHMENT 1 Mr. Smith stated that he believes three of the options are viable, and staff recommendation is for Option 3, because it won’t cost commercial customers money in 2015 and allows the City to establish an allotment for all commercial customers. He stated he is taking this item to Council in the August 26 Work Session, then the Council would take action later in the year. Any allotment changes must be implemented on Jan. 1, 2015 because the allotment is given annually. No action is required of the board now, but Mr. Smith can include any board comments on the AIS.  A board member inquired about the number of customers without an allotment who would have exceeded it if it were applied. Mr. Smith clarified that 195 commercial customers with allotments in 2013 paid the excess surcharge, and 168 plus 16 commercial customers without an allotment were in excess. Mr. Smith stated that typically if they exceed, they exceed it by a lot. It’s an annual allotment. If at any time before December 31 a customer has additional water rights, their allotment is increased for the year. Customers on the cusp, such as breweries with 10% to 30% growth per year, may choose to wait until October to see if they need additional water rights.  A board member inquired whether it’s possible to simply eliminate the allotment and modify the tiered rates as necessary, which would achieve an equitable result.  A board member inquired about residential lawn water requirements, and also how do you compare the water use of a brewery with that of a car wash? Mr. Smith stated a tiered rate would make more sense than a flat rate.  A board member inquired what happens to new customers under Option 3. Mr. Smith stated they are given a standard allotment, and can choose to provide additional water rights.  A board member inquired about whether data exists that backs up the excess surcharge was first promoted to encourage conservation. In 2013, those with an allotment exceeded their allotments, therefore the excess surcharge alone is not driving conservation. Mr. Smith stated there were other reasons for implementing the excess surcharge other than conservation, including determining the capacity of the water treatment plant.  A board member commented that Option 3 continues the inequity and Option 1 would eliminate it.  A board member recommended Option 1, and asked about the possibility of phasing in the surcharge in 2016 or 2017, which would create equality and still bring in revenue. The idea is to start with a smaller surcharge and phase it in over three years.  A board member stated it would be easy to explain a new structure to customers if it’s fair, such as Option 1.  A board member discussed the cost of service to make it equitable, versus having customers pay for a chunk of the water treatment plant they’re not using, and also questioned the consequences of commercial customers exceeding their allotment.  Mr. Dustin stated the issue is about business equity, trying to fix the inequity, not about trying to increase revenue.  Mr. Smith indicated his concern about Halligan Reservoir and paying for storage, paying for more raw water and not having any storage, or developing storage and exercising all the raw water rights we have today. He stated the plan was always to have cash-in-lieu-of water rights. These customers are using more water rights than they’ve paid for, and this is a way to receive payment for it.  A board member summarized businesses as belonging to one of two categories: those that don’t experience growth (such as restaurants that have dishes to wash), and those that do (such as breweries), and the City must adjust for that due to concerns about the water supply. Do you reevaluate allotments every year?  Mr. Smith stated he will add an Option 7 about phasing in a surcharge over three years, resulting in equity.  A board member inquired if everything was included in the cost of service study, such as future development of growth industries, and to say why we’re doing it; it’s an opportunity to start from scratch. Mr. Smith stated it does include raw water costs.  A board member stated that doubling the average get close to equity, and likes the idea of starting from scratch, because there are some customers who have been getting a free ride.  A board member suggested deleting Option 2 because it’s not fair to customers.  A board member expressed support for developing allotments from scratch, or discontinuing the whole program, if equity is the goal.  A board member suggested adjusting the excess surcharge so that customers don’t receive a 20% increase; new customer would receive a 5% surcharge, for example.  Mr. Smith stated he will present the options to Council at the Aug. 26 Work Session, and return to a future board meeting. An ordinance or resolution would be required for an eventual code change. No motion was made on this agenda item. 1 Commercial Water Allotments City Council Work Session September 30, 2014 ATTACHMENT 2 2 Purpose Seek direction for potential changes to commercial water allotments 3 What is a water allotment? • Maximum annual use without increased rate – Surcharge rate applied for use over allotment • $3.06 per 1,000 gallons • Added to normal rates – Revenues used to acquire additional supplies Annual Water Use Annual Allotment Normal (non-surcharge) Rates Surcharge Rates 4 How is a commercial allotment determined? • New commercial development provides water – Raw Water Requirements (RWR) • Set amount of water required for tap size – Based on average use for that tap size – Provides water through 1-in-50 year drought • Developer provides water rights or cash-in-lieu 5 What are the City’s allotments? Meter Size (inches) Minimum RWR (acre-feet) Minimum Annual Allotment (gallons/year) 0.75 0.9 293,270 1.0 3.0 977,550 1.5 6.0 1,955,110 2.0 9.6 3,128,170 3.0 14.4 4,692,250 4 and above Based on use Based on use 6 Do all commercial customers have allotments? 35% 65% Yes No 7 Why do most commercial customers not have allotments? • 1984 – City Code change – Excess Water Use Surcharge established • Proper water supply planning – Applied to service permits after March 1, 1984 • Existing customers were “grandfathered” 8 Can the Surcharge Rate be Avoided? • YES: Customer can increase their water allotment – Provide additional water rights/cash (RWR) • Still provides proper water supply planning Annual Water Use Increase Allotment (RWR) 9 Why is this an issue? • MAIN: Business inequity – Advantage without allotment • Additional water supplies – Surcharge revenues only used for developing supplies 10 Business Inequity Example Business1 (no allotment) Annual cost $12,771 Conditions: Water use 20% over 2-inch allotment (3.75 million gallon per year) No use difference, but cost difference of $2,853 (22% higher) Business2 (has allotment) Annual cost $15,624 11 How many commercial customers go over the allotment? 0% 2% 4% 6% 8% 10% 12% 2009 2010 2011 2012 2013 Percent of Customers Year Percent of Commercial Customers Using Over the Standard Allotments (~2,600 customers) With Allotment No Allotment 12 How much water is used over the allotments? 0 20 40 60 80 100 120 140 160 180 200 2009 2010 2011 2012 2013 Use (millions of gallons) Year Amount of Water Use Over the Standard Allotments With Allotment No Allotment 13 What is the average cost to customers? $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 2009 2010 2011 2012 2013 Revenue Year Average Customer Cost for Water Use Over the Standard Allotments With Allotment No Allotment 14 How much revenue is generated? $- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 2009 2010 2011 2012 2013 Revenue Year Revenue for Water Use Over the Standard Allotments With Allotment No Allotment 15 Do others have commercial allotments? • YES: Tri-Districts (ELCO, FCLWD, NWCWD) – Serve many within City limits • YES: City of Loveland • NO: City of Greeley 16 16 Fort Collins Area Water Districts Map Population and Area Served Current (existing City limits): Utilities: 80% pop. – 55% area Others: 20% pop. – 45% area Future (GMA): Utilities: 65% pop. – 45% area Others: 35% pop. – 55% area 17 How can this issue be addressed? • Apply allotments to all commercial customers • Variations on how to do this – Looked at several, consolidated to few options • May increase costs for those with new allotments 18 Option 1: Apply Standard Allotments • Allotment based on meter size • Average 2015 cost increase = ~$1,900 (if same use) • Favored by Water Board (June 2014) • Suggested phase in over 3 years PROS CONS Addresses inequity now Increases bills without Easy to administer increased water use 19 Option 2: Apply Customer Specific Allotments • Allotment = 110% of highest annual use (2009-2013) • No less than standard allotment • Average 2015 cost increase = $0 (if same use) • Percent over highest use could be varied (e.g., 100%) PROS CONS Addresses inequity now Does not fully address inequity More difficult to administer Establishes allotments without immediate cost increases 20 Option 3: Apply Standard Allotments When Customers Change • Allotment based on meter size when customer changes • Average 2015 cost increase = $0 PROS CONS Least impactful to commercial customers Economic inequity could remain for many years Easy to administer (possibly always) 21 Staff Recommendation: • Option 2: Apply customer specific allotment • Sets allotments for all with the least impact to businesses • Changes be effective January 1, 2015 22 Outreach • Potential impacts to customers in most options • Impacts (surcharges) not until mid- to late-year • Communicate changes to commercial customers – Especially affected customers – Suggestions for avoiding surcharges 23 Direction Sought • Would Council like to address this inequity? • Is this item ready for formal consideration? • If so, which option would Council prefer? 24 Thank You customers explaining new allotments and impacts, including growth beyond 10% requiring additional water rights to avoid the surcharge 3 Apply Standard Allotments when Customers Change $0 Would be least impactful to commercial customers; easy to administer Economic inequity among customers would remain for many years (or possibly always) Only necessary for new customers Because the annual water allotments are based on the calendar year, any changes to the allotment need to be implemented on January 1st. Although allotment changes would be applied at the beginning of the year, the impacts would not be seen by commercial customers until mid- to late-year once their cumulative use gets close to the determined allotment. This would allow several months for Utilities to provide outreach to the affected customers, which would include suggestions for how these customers could plan for the changes and possibly avoid the surcharges.