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HomeMy WebLinkAbout06.b. Review the following proposed new Board Policy: BP 030 – Cost of Service Studies 6mbo J&X_ LCentral Contra Costa Sanitary District June 20, 2017 TO: ADMINISTRATION COMMITTEE VIA: ROGER S. BAILEY, GENERAL MANAGER C4, FROM: PHIL LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION JEAN-MARC EIE:TITI DIRECTOR OF ENGINEERING AND TECHNICAL SERVICES r' SUBJECT: ADOPTION OF COST OF SERVICE STUDY FREQUENCY POLICY The attached proposed policy addresses the frequency with which Central San would conduct a cost of service study to support rates charged to customers. Central San's annual Sewer Service Charge is subject to a number of legal requirements, including a periodic cost of service study. Central San conducted a cost of service study in 2015, and that study has served as the basis for rate adjustments approved by the Board through FY 2018-19, and potentially beyond. A cost of service study typically includes: • Revenue requirement analysis to provide adequate funding levels for operations and maintenance costs and capital infrastructure of the District; Cost allocation methodology to fairly allocate the cost to provide service to the District's various types of customers; • Rate designs and structures to recover the cost allocable to each customer class. In addition to customary ratemaking practice, California's legal environment requires a periodic cost of service study. Legal and statutory requirements governing this matter include Proposition 218 and California Government Code Section 54999.7. Language in Proposition 218 addressing costs and fees addressed in the steps of the cost of service study noted below: SEC. 6. Property Related Fees and Charges. (1) Revenues derived from the fee or charge shall not exceed the fands required to provide the property related service. (2) Revenues derivedfirom thefiee or charge shall not be used for any purpose other than that for which the fee or charge was imposed. Administration Committee Adoption of Cost of Service Study Frequency Policy Page 2 (3) The amount of afte or charge imposed upon any parcel or person as an incident(�f property ownership shall not exceed the proportional cost of the service attributable to the parcel. California Government Code Section 54999.7 sets a minimum standard for how often a ,cost of service study must be conducted: A public agency providing public utility service shall complete a cost of service study at least once every 10 nears that addresses the cost of providing public utility service to public schools. The study shall describe the methodology fog-the determination of cost responsibility, which may be identified by reference to appropriate industry ratemaking principles, including guidance associated with designing and developing water rates and charges issued by the American Water Works Association or guidance associated with other comparable industry principles recognized by public agencies providing public utility service. Central San recognizes that a policy on cost of service should meet the minimum legal requirement, and potentially set a stricter standard if warranted by other factors. Staff developed the attached policy using the following process: 1 . Discussed with District Counsel the legal requirements for cost of service - frequency; 2. Discussed cost of service study frequency with Raftelis Financial, the consulting firm that prepared Central San's 2015 Cost of Service Study; and 3. Internally discussed alternatives and developed a proposed policy. The proposed policy meets the legal requirement of a study at least once per decade while appropriately recognizing that there may be circumstances which drive more frequent updates. More frequent updates balance the goals of avoiding legal risk and providing accurate rates by customer class against the desire for cost consciousness and the attempt to avoid unnecessary staff and consultant expenses. Preparing a cost of service study more frequently than necessary would not be cost effective'. However, setting rates without a valid cost of service study exposes Central San to potential lawsuits from customers claiming their rates are set at a higher level than should be the case due to inappropriate allocation of costs. The costs of defending such a lawsuit, and addressing remedies could be significant. Alternatives related to a cost of service frequency policy include: 1 . Do not adopt a cost of service frequency policy. 1 The 2015 Cost of Service study work was part of a $400,000 contract with consultant Raftelis Financial Consultants. The Cost of Service work was specified to cost approximately$42,000 in consulting costs, exclusive of costs for project kick-off, Board workshops and presentations, and Central San staff time. Administration Committee Adoption of Cost of Service Study Frequency Policy Page 3 2. Adopt a policy that sets the frequency of the study consistent with the legal requirement, and provides direction that the study may be reperformed or updated more frequently when necessary in the judgement of staff. I Specify that the cost of service study should be performed more frequently than required by law by selecting a frequency, such as "at least every (5, 7, or XX) years". Staff recommends alternative number 2. A policy has been drafted that specifies that the cost of service study should be performed at least every ten years, but that each time rate changes are proposed, staff should assess and report to the Board whether the most recent cost of service study is still viewed as valid. The steps in the assessment that staff would undertake in this process are documented in a General Manager maintained Administrative Procedure. The Administrative Procedure is attached for information only to this memorandum. Attached Sup2ortiaq Documents.- Proposed Cost of Service Frequency Policy • Proposed Cost of Service Frequency Policy Administrative Procedure central Contra costa Number: BP 030 Sanitary District Related Admin. Procedure AP 030 Authority: Board of Directors Effective: 12017 Revised: Reviewed: www.centralsan.org Initiating Dept./Div.: Administration/Finance BOARD POLICY COST OF SERVICE STUDIES PURPOSE Central San, as a public utility, calculates and sets rates based on the cost of providing services to, customers. The State of California Government Code, including Section 54999.7, requires that public agencies periodically conduct a cost of service study. This Policy directs the Central San to comply with this requirement. An accompanying administrative procedure provides other guidance related to the need to ensure adequate cost support exists for changes in Central San rates. POLICY I. A cost of service study addressing rates subject to Proposition 218 shall be conducted not less than once every ten years. This policy is consistent with state law specifying that any public utility serving a public school must perform a cost of service study not less than once every ten years. 11. A new or updated cost of service study may be appropriate more frequently in certain circumstances, to be assessed by staff each time rate changes are proposed. Staff shall report to the Board at the time of the proposed rate change on whether, in staff's opinion, the Cost of Service study remains a valid basis for the rates. An administrative procedure addressing this assessment is maintained by the General Manager. [Original Retained by the Secretary of the District] central Contra costa Number: AP 030 Sanitary District Related Board Policy: BP 030 Authority: Effective: 72017 Revised: www.centralsan.ot-g Reviewed: Initiating Dept/Div: Engineering and Technical Services Date Signed: Phil Leiber, Director of Finance& Administration Roger S. Bailey, General Manager ADMINISTRATIVE PROCEDURE COST OF SERVICE STUDIES PURPOSE To establish procedures in support of Board Policy No. BP 030 — Cost of Service Studies. PROCEDURES I. Central San Board Policy specifies that a cost of service study addressing rates subject to a Proposition 218 notice shall be conducted not less than once every ten years. II. Anew or updated cost of service study may be warranted more frequently in certain circumstances. This may include developments in case law, best practices as followed by other similarly situated agencies, advice of counsel and industry groups, or changes in Central San's financial and operating situation since the last cost of service study. Specifically, the latter includes when there have been significant changes in Central San's cost structure since the date of the last cost of service study (such as significant increases in capital spending or significant changes in the overall composition of the revenue requirement), or changes in the factors used to determine the allocation of Central San costs between customer classes. Ill. In light of the circumstances described in 11, at each instance overall Sewer Service Charge rates are set and brought to the Board for approval, staff should assess the validity of the last cost of service study, and (1) continue to accept the Number: A►P 030 COST OF SERVICE STUDIES Page 2 of 2 last study as appropriate (2) conduct an update of the study, or (3) arrange for a new study. A record of this review shall be established and maintained as part of the annual budget process and 1 0-year plan updated annually. The review shall include: 1 A comparison of the overall Central San revenue requirement for the years of the proposed rate increases against the revenue requirement for the years considered in the last cost of service study. 2. A comparison of the costs for Central San's major divisions for the years of the proposed rate increases against the projected costs for such divisions for the years considered in the last cost of service study. 3. The overall customer mix (Single Family Rate (SFR), Multi Family Rate (MFR), and commercial) in the Central San service territory, potentially to include: a. Material changes in the customer mix b. New customer classes or rates 4. The anticipated flows by customer type (SFR, MFR, Commercial, Contract/Concord) In the event of material changes in the above, staff shall assess whether changes in cost allocations between classes are warranted and if so, shall prepare, make available for Board and public review, and maintain documentation necessary to support such cost allocation revisions. This may be accomplished through an update of the last study or a new study. [Original Retained by the Secretary of the District]