FY22 Water and Sewer Rate Study Update and Proposal - Finance Committee Presentation - 16 April 2021 — File 211857

1 Somerville Water & Sewer Rate Study Update, FY2022 Rate Proposal

Current FY 2022 Proposal S O M E R V I L L E 2 0 2 1 R E V E N U E S U F F I C I E N C Y 2 • Water usage rate adjustment of 7.00% • Sewer usage rate adjustment of 10.50% • Rate increases will support needed capital investments, many of which will ensure continued regulatory compliance • Pilot affordability program with $100K stabilization appropriation to address acute needs in the community • Utility Funds receive $2M annually in stabilization contributions

Agenda • Rate Study Overview • Affordability Analysis • Revenue Sufficiency • FY2022 Rate Proposal 3

Recent history of rate discussions C O N T E X T 4 26 Feb 2019 Capital needs overview 9 Apr 2019 Rate proposal 13 March 2020 Owner Occupied Exemption overview 10 Nov 2020 Rate Study scope review

Rate Study Scope Progress C O N T E X T 5 Task Status Affordability analysis Complete, included in this presentation Data collection / model build Complete, informs analysis Forecast of revenue requirements (10-year window) Complete, included in this presentation Rate design In process, subject of future presentations and collaboration Implementation plan and billing practices review Not started

Affordability S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 6

Utilities Face Steep Inflation S O M E R V I L L E 2 0 2 1 R E V E N U E S U F F I C I E N C Y 7 0% 20% 40% 60% 80% 100% 120% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

EPA’s Regulatory Requirement of Affordability Demonstrates Low Burden S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 8 $752 (Average Bill) $97,328 (Median Income) = 0.77% Current Residential Indicator Unaffordable Residential Indicator $4,379 $97,328 = 4.5%

2021 WARi® Affordability S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 9 WARi® • Weighted Average Residential Index (WARi®) • Calculate residential indicator for every income bin in every census block group – 32,000+ calculations • Calculate weighted average over all census tracts for a single WARi® value Key Findings • Utility unaffordability in the service area is not widespread • Affordability is an account-by- account dynamic • Any efforts would need to be tailored and targeted

Households with Unaffordable Utility Bills According to WARi S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 10 8.6% of Total Households 2,180 3,460 2,820 Low Estimate* High Estimate* *Range based on census statistical error in ACS data

Target Affordability Program Considerations S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 11 • Affordability programs normally consider income (ex: 200% of federal poverty line) • Ideally, partner with an agency such as the City of Cambridge, who already administers the Low-Income Home Energy Assistance Program (LIHEAP) for Somerville • Federal funding is expected to become available

Affordability Pilot Program Design S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 12 • Income level scaling: less income = more assistance

Revenue Sufficiency S O M E R V I L L E 2 0 2 1 R E V E N U E S U F F I C I E N C Y 13

CIP April 2021 update 14

CIP Driver update 15 • Water System Improvement Plan – Complete (2020$) • $150M immediate action, implies $15M/year need 10 years • Additional $300M long-term need • Sewer System Improvement Plan – Underway • Drainage & Water Quality Improvement – Early 2022 – Placeholder sewer separation projects • CCTV Evaluation Study – Ongoing • Regulatory • MS4 Administrative Order – On schedule • CSO – Overflows underperforming, court inquiring about Somerville

Revenue Sufficiency Components S O M E R V I L L E 2 0 2 1 R E V E N U E S U F F I C I E N C Y 16 Annual Revenue Requirement Personnel Expenses Operating Expenses Vehicles & Equipment Debt Service Capital Projects Reserve Contributions

Water Control Panel (Just in Time Example) 17

Sewer Control Panel (Just in Time Example) 18

Key Customer Impacts S O M E R V I L L E 2 0 2 1 R E V E N U E S U F F I C I E N C Y 19 Total Change in Annual Costs for Various Billing Units (including base & volumetric charges, amended) Total Units per Bill (in CCF) FY 2021 FY 2022 $ Change Annual Total Annual Total (FY 2022 - FY 2021) % Change 15 (average condo unit) $784 $840 $55.98 7% 18 (average single family home) $946 $1,017 $70.92 7% 30 (average two-family home) $1,597 $1,727 $130.68 8% 42 (average three-family home) $2,247 $2,437 $190.44 8% 110 (average 8-unit apartment building) $6,043 $6,583 $539.40 9%

FY22 Proposal 20 • Public Hearing May 3 at 6PM • Water usage revenue adjustment 7.00% FY 2022 • Sewer usage revenue adjustment 10.50% FY 2022 • Appropriate $100K for a pilot affordability program • Appropriate $2M annually in stabilization contributions • Schedule meetings for rate design in August

Questions/Discussion 21

Appendix 22

Rate Study Process S O M E R V I L L E 2 0 2 1 R A T E S T U D Y 23 Revenue Sufficiency • Achieve financial policies & targets • Fund system investment needs • Sustainably fund operations Defensible Allocation Methods • Utilize industry accepted approaches • Maintain inter and intra class equity • Determine correct and appropriate units of service Simple, Equitable & Sustainable Rates • Balance affordability and financial objectives • Accomplish revenue stability • Clear communication of costs How Much? From Whom? How to Collect?

Revenue Sufficiency S O M E R V I L L E 2 0 2 1 R E V E N U E S U F F I C I E N C Y 24

Financial Plan S O M E R V I L L E 2 0 2 1 R E V E N U E S U F F I C I E N C Y 25 Financial plan is designed to ensure revenues equal revenue requirements over- time in order to provide structural balance Revenue requirements of the water and sewer system consist of: Operating and maintenance expenses Existing debt service Capital improvement plan (cash funded or borrowing) MWRA water supply/wastewater treatment cost Revenues of the system are generated from:  User rates (metered water use)  Stabilization Fund deposits  Miscellaneous other income (ex: interest income)

Core Assumptions S O M E R V I L L E 2 0 2 1 R E V E N U E S U F F I C I E N C Y 26 • The pandemic subsides and utility demands normalize in Fiscal Year 2022 • Utility Funds receive $2M annually in stabilization contributions • MWRA cost will escalate at an average rate of 3-4% per annum • Capital investment plan utilizes debt financing • Maintaining reserve balances to preserve flexibility • Assuming 100% spending of operating and capital expenses

Water Control Panel (Diagnostic) 27 Reserves Depleted Cash Flow Imbalance Current Revenues Maintained

Water Control Panel (Just in Time) 28 Sustainable Cash Flow Reserves Maintained Just in Time Adjustments

Water Control Panel (Level Solution) 29 Sustainable Cash Flow Reserves Maintained “Smooth” Revenue Adjustments

Sewer Control Panel (Diagnostic) 30 Reserves Depleted Cash Flow Imbalance Current Revenues Maintained

Sewer Control Panel (Just in Time) 31 Reserves Maintained Sustainable Cash Flow Just in Time Adjustments

Sewer Control Panel (Level Solution) 32 Reserves Maintained Sustainable Cash Flow “Smooth” Revenue Adjustments

Affordability S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 33

Affordability Analysis S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 34 • Calculated affordability looking at the City service area (Regulatory) • Analyzed billing data and census block groups to identify affordability at the “neighborhood level” • Estimated how many individual households have an unaffordable water & sewer bill

Owner Exemption and Affordability Challenge S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 35

Hours Worked Affordability Metric S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 36 Hours Worked Metric (HM) • Measures number of hours worked at minimum wage to pay water and sewer bill • Service considered affordable when less than 8 hours worked to pay monthly bill Monthly Bill Minimum Wage = Hours Work $78.87 $13.50 = 5.84 Hours

$ 764.25 $- $ 200 $ 400 $ 600 $ 800 $ 1,000 $ 1,200 $ 1,400 Wastewater Water Average 2021 Peer Survey – Residential @ 54 CCF Annually S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 37

Rate Design S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 38

Rate Design Considerations S O M E R V I L L E 2 0 2 1 A F F O R D A B I L I T Y A N A L Y S I S 39 • Next step in the analysis will evaluate billing practices and customer classifications • Meter replacement program will add key additional data for consideration • Analyzing customer volume and system use data • Anticipating council conversation over the next year and implementation FY 2023

Options for Scaling Base Charge S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 40 0 20 40 60 80 100 120 140 160 5/8" 3/4" 1" 1 1/2" 2" 3" 4" 6" 8" Current AWWA Average Use • Represents cost that the utility incurs in standing ready to serve customers when their demands occur 24/7 • Cost should scale by meter size 5/8” 3/4” 1” 1.5” 2” 3” 4” $20.00 $20.00 $20.00 $40.00 $64.00 $120.00 $200.00 1.0 1.0 1.0 2.0 3.2 6.0 10.0 Meter Size Base Fee Scaling 6” $400.00 20.0 8” $400.00 20.0

Volumetric Charge Considerations S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 41 Tier Volume CCF Rate 1 0-8 $4.20 2 9-13 $4.68 3 14-67 $6.74 4 68-133 $7.06 5 >133 $7.34 Tier Volume CCF Rate 1 0-10 $4.68 2 11-100 $6.74 3 101-200 $7.06 4 >200 $7.34 Commercial Bi-Monthly Residential Tri-Annual Volume Charge • Considering the treatment of multi-unit properties with a single meter • Analyzing the tier breakpoints for residential, using the most current census data and volumetric trends • Evaluating the appropriateness of commercial tiers in light of industry standards

Elements of Rates S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 42 Charge Type Base Charge Volume Charge

Elements of Rates- Base Charge S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 43 Charge Type Base Charge How is it Applied Fixed amount per meter Rationale Many of Utilities’ costs are fixed (ex: debt) Fixed revenues protect the utility from changes in demand Bond rating agencies measure fixed cost recovery Industry best practice

Elements of Rates- Volume Charge S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 44 Charge Type Base Charge How is it Applied Fixed amount per meter Rationale Convey conservation messaging Encouraged by regulation Allows customers to control their bill Key measure of system utilization Volume Charge Based on use in CCF

Balancing Objectives S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 45 Simplicity Proportionality Revenue Requirement Industry Standards

Residential Tiers S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 46 Simplicity Currently Five Tri-Annual Tiers in Place Tier Volume CCF Rate 1 0-8 $4.20 2 9-13 $4.68 3 14-67 $6.74 4 68-133 $7.06 5 >133 $7.34 80% of Volume 20.6% 11.8% 49.3% 6.5% 11.8% 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Residential Billed Volume by Tier (CCF) Current

Reducing Residential to Three Tiers S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 47 Simplicity 1 2 3 All Additional Use Small Household Typical Indoor Usage Description Value People per Household 1.35 Typical Indoor Use (Gallons per Capita per Day) 36.7 Typical Essential Domestic Use (CCF/Tri-Annualy) 8 Average Household Typical Indoor Usage Description Value People per Household 2.37 Typical Indoor Use (Gallons per Capita per Day) 36.7 Typical Essential Domestic Use (CCF/Tri-Annualy) 14

Multi-Unit Residential Pays More S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 48 Proportionality 3 Unit Total Tri-Annual water Bill: $243 $268 12.3% 7.7% 80.0% 61.5% 38.5% 0.0% 0 20 40 60 Tier 1 Tier 2 Tier 3 Billed Volume per Tier Current Revised 3 Dwelling Units and one meter 3 Dwelling Units and 3 meters 10.5% higher 3 Unit Total Tri-Annual Use CCF: 39 Tiers as currently constructed can do not account for multiple units, resulting in higher bills for multiple units 39 Meter Size: 5/8”(3) 5/8”(1)

Multi-Unit Residential Pays the Same S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 49 Proportionality 3 Unit Total Tri-Annual water Bill: $243 $243 12.3% 7.7% 80.0% 61.5% 38.5% 0.0% 0 20 40 60 Tier 1 Tier 2 Tier 3 Billed Volume per Tier Current Revised 3 Dwelling Units and one meter 3 Dwelling Units and 3 meters 0% higher 3 Unit Total Tri-Annual Use CCF: 39 Tiers can be constructed to account for multiple units, resulting in equal bills per unit 39 Meter Size: 5/8”(3) 5/8”(1)

Commercial Tiers S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 50 Simplicity Currently Four Bi-Monthly Tiers in Place Tier Volume CCF Rate 1 0-10 $4.68 2 11-100 $6.74 3 101-200 $7.06 4 >200 $7.34 98% of Volume 1.9% 12.7% 10.8% 74.6% 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 Tier 1 Tier 2 Tier 3 Tier 4 Commercial Billed Volume by Tier (CCF) Current

Reducing Commercial to One Tier S O M E R V I L L E 2 0 2 1 R A T E D E S I G N 51 Simplicity Proportionality 1.9% 12.7% 10.8% 74.6% 100.0% 0.0% 0.0% 0.0% 0 100,000 200,000 300,000 400,000 500,000 600,000 Tier 1 Tier 2 Tier 3 Tier 4 Commercial Billed Volume by Tier (CCF) Current Revised • Commercial demand drivers are individualized based on the type of business • The most common rate structure applied to commercial customers is a uniform rate • Single tier creates proportionality between all commercial users