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Home My WebLink About06.c. Adopt new Board Policy No. BP 030-Cost of Service Studies 6.c. Central Contra Costa Sanitary,District BOARD OF DIRECTORS ----- POSI rION PAPER Board Meeting Date: JULY 612017 Subject: ADOPT NEW BOARD POLICY NO. BP 030 — COST OF SERVICE STUDIES Submitted By: Initiating Dept/Div.: Thea Vassallo Administration Finance Manager Finance REVIEWED AND RECOMMENDED FOR BOARD ACTION: Phil Leiber, director of Finance and Administration Roger S. Bail4y General Manager ISSUE: Central San, as a public utility, calculates and sets rates ed 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. BACKGROUND: Central San's annual Sewer Service charge is subject to several 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 Fiscal Year 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 Central San; • Cost allocation methodology to fairly allocate the cost to provide service to Central San's various types of customers; and 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 study are noted below: SEC. 6. Property Related Fees and Charges. (1) Revenues derived from the fee or charge shall not exceed the funds required to provide the property related service. Page 1 of 3 POSITION PAPER Board Meeting Date: J U LY 612017 Subject: ADOPT NEVA BOARD POLICY NO. BP 030 — COST OF SERVICE STUDIES (2) Revenues derived from the fee or charge shall not be used for any purpose other than that for which the fee or charge was imposed. (3) The amount of a fee or charge imposed upon any parcel or person as an incident of 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 years that addresses the cost of providing public utility service to public schools. The study shall describe the methodology for 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 Board Policy No. BP 030 - Cost of Service Studies 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. Page 2 of 3 POSITION PAPER Board Meeting Date: JULY 07 2017 Subject: ADOPT NEW BOARD POLICY NO. BP 030 — COST OF SERVICE STUDIES Preparing a study more frequently than necessary would not be cost effective. However, setting rates without a valid 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/CONSIDERATIONS: Alternatives related to a cost of Service Study frequency policy include: 1. Do not adopt a Cost of Service Study frequency policy. 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 judgment of staff. 3. Specify that the study should be performed more frequently than required by law by selecting a frequency, such as "at least every (5, 7, or XX) years". FINANCIAL IMPACTS: None at this time. COMMITTEE RECOMMENDATION: The Administrative Committee reviewed this matter at its meeting on June 20, 2017 and recommended alternative number 2 above, adopt a policy that sets the frequency of the study consistent with the legal requirement, and provides that the study may be reperformed or updated more frequently when necessary in the judgment of staff. RECOMMENDED BOARD ACTION: Adopt new Board Policy No. BP 030 — Cost of Service Studies. Attached Sypporting_Document. 1. BP 430- Cost of Service Studies Page 3 of 3 ATTACHMENT 1 Central Contra costa Number: BP 030 -SanitaDis%&ict Related Admin. Procedure BP 030 Authority: Board of Directors Effective: , 2017 Revised: Reviewed: 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. II. Anew 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]