11-25-2013 Council Work Session Packet

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0 MEMORANDUM TO: CITY COUNCIL FROM: JESSE STRUVE, PE SUBJECT: UTILITY RATE INCREASES DATE: 11/25/13 CC: WATER RATES In 2009, the City hired Elhers to assist the City in performing a rate study for the sanitary sewer, storm sewer, and water enterprise funds. This rate study indicated there should be numerous changes to the existing rates of all the enterprise funds and gave recommended rate increases through 2016 (see Exhibit A). In 2012, staff and Bolton and Menk created a 20 year Capital Improvement Plan (CIP). The CIP outlines anticipated revenues and capital improvements. The CIP also provides estimated yearly e��d-of-year fund balances. The results of the 2012 CIP and the draft 2013 CIP provide a stark realization as to the long term impacts to the Storm Sewer and Water Enterprise Funds. At the October 28`�' work session, the Council indicated they would like staff to analyze whether it makes sense to have two different water rates. Staff analyzed each system and calculated the annual expenses and revenues for each system (see attached Exhibit B & C). Based on the existing condition of each system, the cost of producing water is significantly higher in the Navarre system ($5.57 per unit in Navarre and $3.96 per unit in North system). According to the Draft 2014 CIP, there is a number of capital projects associated with the north system. These improvements include the repainting of the water tower, the installation of a new well, and improvements to the existing well house. When these improvements are complete, the depreciation increases for the North system increases by approximately $34,000. Since the north system has a low number of connections and has less revenue in comparison to the Navarre system, even a small increase in expenses will afifect the unit cost of production. Once the added depreciation is included in the equation, the cost of producing water in both systems becomes much closer ($5.57 per unit in Navarre and $5.14 in the North system). Because of the few connections to the North system, it becomes very expensive to maintain a water system and ultimately the costs of production in the North system are comparable to delivering softened water in the Navarre system. Therefore, it is recommended to keep one rate structure for all water systems in Orono. According to the 2009 Rate Study, it was recommended there should be an increase of 8% to the 2013 water rates. While a jump in rates of 8% is significant, it does not address the short or long term issues with the water system. The Fund Balance sheet included in the Draft 2014 CIP (see attached Exhibit D), indicate the fund balance will be depleted by 2017.