BF council discusses water, sewer rates

BONNERS FERRY — A public rate meeting Aug. 12 laid out water and sewer rate options for Bonners Ferry’s city council and citizens.

A small audience was on hand for a water and sewer cost of service analysis (COSA) presentation by Gary Saleba, CEO of EES Consulting.

“Public utilities are a zero-sum game,” said Mayor Dave Anderson, “We’re not in a competitive market, and not in it to make money.”

The city even pays itself for water and sewer in its public buildings, and for filling up the city pool to keep costs real, the mayor said.

“To set a rate, plan for improvements and upgrades, we have to charge a fair amount per unit of use. This is why we hired specialists in cost of service,” Anderson said.

“The goal is for every customer to pay a fair share,” said Saleba, describing the process for setting rates for public utilities. Rates should meet the revenue requirement, be cost-based, easy to understand and administer, and fair and equitable, Saleba said.

Rate setting follows a four-step process, beginning with discerning how much revenue is required, then performing a COSA study to decide how best to balance rates. This was the step presented by Saleba. After the city and citizens have sufficient time to digest the COSA study, the third step will be to design fair and equitable rates balanced among all customers. Finally, the city will need to implement the new rates.

To determine the revenue requirement, Saleba took into account operations and maintenance costs, capital expenses needed to fix or replace aging infrastructure, service on existing and possible future debt and emergency reserves needed.

Saleba gave the City Council and citizens of Bonners Ferry three options for adjustment of water rates and four options for sewer rates.

A recent bond was responsible for a number of updates to the water system, said city administrator Stephen Boorman, which will require less capital investment than the sewer system.

To get his three options for water rate increase, Saleba assumed 1.5 percent increase in water usage per year, and .6 percent customer increase, following growth trends. Expenses will grow at 3 percent per year, and capital spending should match depreciation of the water system, $330,000 per year, he said.

Reserve/contingency funds were also taken into account, maintaining a $500,000 balance for the base case reserve or trying to meet a recommended target of $1.4 million with an additional $900,000 in contingency funds.

For Saleba’s base case, $1,104,233 will be needed for fiscal year 2014, a 3.6 percent increase from 2013. This 3.6 percent increase will take care of the base revenue requirements if it is applied to the rate every year, Saleba’s report said. Fiscal year 2015 will require $1,120,796 and 2016 will require 1,130,511, according to the report.

Saleba also looked at the balance between customer classes in his report, showing that some customers pay a larger portion of the overall rate burden that others.

For example, residential customers inside the city pay a rate 8.6 percent higher than a fair balance, where residential customers outside city limits pay rates 15 percent too low. The largest imbalance was for commercial customers inside the city, whose bill in relation to usage is 54.9 percent too low, while industrial users inside city limits pay rates that are 86.6 percent too high.

Saleba’s base case 3.6 percent increase assumes no reserve fund increase, using existing reserves for rate stabilization. For the second two water rate scenarios, the higher rate increases would be used to build emergency and contingency reserves, and be able to use these reserves for rate stabilization.

Option two, building the reserves to $950,000 over the next five years, would require a 5.9 percent increase every year until 2018, Saleba said. Option three would build the reserves to $725,000 over five years and would require a 4.8 percent increase each year.

The sewer system will require more capital improvements than the water system, many of which cannot be completed using depreciation funds. To answer questions regarding capital improvements, Brett Converse, an engineer with JUB Engineers, Inc. and author of the 2013 sewer master plan for Bonners Ferry was on hand.

“Our system seems to be reaching critical mass,” said Anderson, asking Converse, “How are we doing compared to other similar cities in our area?”

“You fall in the middle,” said Converse, hedging, “maybe worse off than most.”

The system was built 37 years ago, Converse reported, with no significant changes since then.

“Some of your systems are pretty critical and old,” he said. “Some of the system has reached the end of it’s useful life.”

One positive note, he said, was that the nutrient-deficient and high-flowing Kootenai River is not going to require system changes as far as nitrogen and other nutrient discharge is concerned, in comparison to Coeur d’Alene’s system, which is undergoing massive overhaul in order to meet tighter restrictions for discharge into their river.

The Bonners Ferry system is having to remove suspended solids such as algae and is under temperature restrictions for TMDL, total maximum daily load.

Improvements needed in the sewer system include repair and update of lift stations, pumps that move the sewage uphill. Of the eight lift stations in the city, five are showing deterioration, two with significant deterioration, according to JUB’s Sewer Master Plan. Improvements to the treatment plant include a headworks room that would filter out solids before they reached treatment lagoons, Boorman said, and filters to catch suspended solids and treat for algae before the water is discharged to the river.

“The regulatory climate is a moving target,” Boorman said, “testing has doubled or tripled in the last decade since I’ve been here.”

Saleba’s sewer rate options assume a 3 percent usage increase per year, customer increases of .6 percent per year and $82,000 capital spending equal to depreciation. Base case reserves are set at $500,000 with a reserve target of $1 million.

Saleba’s base case, with no new improvements on the sewer system requires $489,095 for fiscal year 2014, $398 short of needed revenues and requiring a .1 percent rate increase every year to keep the status quo.

Sewer rate balance between customers has residential customers inside and outside city limits paying 16.4 and 11.5 percent higher rates than an equitable burden respectively, Saleba reported.

Commercial customers inside and outside the city have rates 42.4 percent too low.

Saleba’s four options for sewer rate increase include options for increasing reserves, and for capital investment into the needed improvements using both rate increase and bond funds.

The first scenario would build reserves to $750,000 over five years, but has no capital investment. This would require a rate increase of 3.3 percent annually, Saleba said.

Sewer option two would allow the city to take on a $6.75 million bond, which would take care of the stage one critical capital improvements needed. Debt service (premium and interest) on the bond would cost $439,199 a year. With the increased reserves, this would require a 17 percent rate increase annually.

Sewer option three calls for a $3 million bond and $3.75 million in rate increase (over ten years) for capital improvements, with no new reserves. This would require a 19.3 percent increase in rates.

“Will this save us money in the long run, since we won’t have to pay the interest on the bond?” Councilman Mayo asked Saleba.

It will, Saleba replied, since rate financing is immediate, but the trade-off is the cost and effect on customers, he said.

The final option presented by Saleba Aug. 12 has the same bond and rate structure as option 3, but builds $750,000 in reserves. This would require a 21.3 percent rate increase.

A bond would be a revenue finance bond, Boorman said, requiring only 50 percent of voters in favor to pass. Options would include a USDA rural development bond, such as the one procured for the water system update, or an open market bond such as the one used for work on the electrical system. Previous bonds were popular for investors, with the biggest complaint being not enough sold locally.

The council will review options and take public comment at upcoming city council meetings until a new rate is decided. This will be done over the next few months, with final rate decisions likely to be made by the new year. With other recent water department issues, the topic is sure to be at the forefront of the council’s list.

“We’re in the tunnel, and the light coming at us is the train,” Anderson said.