A recently released consultants’ report on Ogden’s utility system uses inconsistent math that would result in a water rate increase significantly higher than it actually claims. While the report states that the recommended overall rate increase during the upcoming year would be 7.8%, the report’s calculations predict that the increase would be 13.2%. Moreover, due to questionable assumptions and shortcuts in these calculations, the actual increase could be as high as 18%.
The report was prepared by Salt Lake City consulting firm Lewis, Young, Robertson, and Burningham (LYRB), and was presented to the Ogden City Council last Tuesday night (May 1) as the final product of a $74,000 comprehensive study of utility department finances.
The main purpose of the study was to determine what overall rate increases would be needed to pay for upcoming water infrastructure projects such as replacement of the filter plant near Pineview Dam. Based on a 10-year financial projection, the report concludes that revenue will be adequate if rates increase 7.8% starting this July 1, another 7.5% in July 2013, and another 6% in July 2014, followed by cost-of-living increases in subsequent years.
However, the LYRB report also recommends a major restructuring and simplification of the water rates, which would shift some of the costs from the largest water users to those who use less water. As indicated in the report (Figure 15, page 19), residents using under 10,000 gallons per month would see rate increases ranging from 10 percent to 32 percent, while some of those using over 45,000 gallons would see a decrease of up to 7 percent. Commercial users could see anywhere from a 55 percent increase to a 15 percent decrease, depending on the connection size and the amount of water used.
Calculating the overall revenue impact of this restructuring is a complicated task, requiring data on water use patterns for each customer type. The LYRB report shows this calculation in Figure 10 (page 15) and Table A8 (Appendix A), basing the calculations on usage data from 2011. The predicted revenue from water sales during the coming year is $15.56 million, which is $629,000 more than needed. If this number is correct, the overall rate increase compared to the current fiscal year would be 13.24 percent. (The current-year revenue from water sales is budgeted at $13.74 million, according to Table A1.)
The same calculations predict that 60 percent of revenue would come from residential customers, even though these customers use only 50 percent of the total water. The LYRB report incorrectly claims on page 15 that residential customers would generate 50 percent of the revenue, plus or minus 5 percent.
Similarly, the proposed rate structure allocates more revenue than intended to the “base rate” that customers pay just for being connected, and less to per-gallon fees. The city council directed that 37.5 percent of revenue come from the base rate, as stated in a draft resolution that was presented to the council last week. The LYRB calculations, however, predict that 41.5 percent of revenue would come from the base rate, while for residential customers, 56 percent would come from the base rate. This is why the rate increase is proportionally higher for residents using less water.
To complicate matters further, the LYRB revenue calculations are based on questionable data and assumptions. Some of the assumed usage numbers are implausible, or at odds with other data sources. Because of the wet spring in 2011, usage was lower than average that year. And the calculations use a simpler rate formula than the one actually being proposed. In most cases, correcting these inaccuracies would result in even higher revenue projections--possibly as high as $16.3 million, or $1.3 million more than the needed amount, during the upcoming year. The overall rate increase for the upcoming year would then be approximately 18 percent.
These inconsistencies in the LYRB report were pointed out by Ogden resident Dan Schroeder, who has been following the utility rate-setting process closely since last fall. Schroeder has made repeated attempts to bring these inconsistencies, and others, to the attention of the consultants and city officials. However, communication has been difficult since mid-March, when the Ogden mayor’s office instructed the consultants and administrative staff not to communicate with Schroeder directly. Chief Administrative Officer Mark Johnson has required that all communications go through him, but has been unavailable in recent weeks because of travel and other duties.
The Ogden City Council will discuss the LYRB rate proposal further at a special work session this Wednesday, beginning at 5:45 pm. The council is scheduled to make a final decision on the new water rates after a public hearing on Tuesday, May 15.
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Technical notes
Most of the discrepancies described above can be traced to the consultants’ inconsistent counting of water customers in terms of “equivalent residential connections” (ERCs). On page 14 of their report, LYRB assume that the number of ERCs is 26,627, but on the following page (Figure 10) they imply that the number is 30,759. Furthermore, both of these numbers over-count residential customers relative to commercial customers, in comparison to their overall water use.
The ERC concept was devised by engineers for the purpose of predicting peak-flow capacities, and this is how the concept was used by consultant Sunrise Engineering in the recently completed Ogden Culinary Water Master Plan. This document assigns nearly one ERC to each residential connection, for a total of 18,916 residential ERCs (see Table 3.3, page 20). The Master Plan counts ERCs for commercial, industrial, and sprinkler connections in proportion to their water use during August 2010, with one ERC for every 49,420 gallons of use. This use level is several times higher than the actual residential average, so each nonresidential ERC uses several times as much water as the average residential ERC. The Master Plan counts a total of 26,206 ERCs, of which 72% are residential. For the purpose of predicting peak flows, this approach is presumably reasonable. But this count of ERCs does not reflect the distribution of actual water use among residential and commercial customers. Nor is it an accurate count of the total number of bill-paying customers, in part due to seasonal fluctuations and in part because it does not include unoccupied properties that are billed even though no water is used (see Master Plan, page 16).
Nevertheless, LYRB took the number 26,206, increased it to 26,627 to allow for population growth, and divided this into the total needed revenue in FY 2013 to obtain a needed revenue of $46.73 per ERC. Multiplying this amount by 37.5 percent, LYRB then obtained their recommended base rate of $17.50 for the predominant residential connection sizes of 3/4 inch and smaller. They assigned correspondingly higher base rates to larger connection sizes, using a procedure based on August 2010 use levels as explained on page 14 of their report. Notably, they assigned 1.66 ERCs to each residence with a one-inch connection, even though the Master Plan assigned no more than one ERC per residence.
Then, to predict the total revenue from the base rates, LYRB used a completely different count of the number of connections, apparently taken during 2011. According to this count and the LYRB procedure, the total number of ERCs for the purpose of revenue would actually be 30,759 (and the number of residential ERCs would be 24,965). Consequently, the predicted revenue from the base rates comes to $6.46 million, which is more than 43 percent (instead of 37.5%) of the required total revenue of $14.93 million. Of the $6.46 million, 81 percent would come from residential customers and 19 percent from commercial customers--a direct consequence of the fact that residential ERCs make up 81 percent of the total of 30,759.
LYRB could still have kept the total revenue at the desired level with an appropriate choice of per-gallon water rates. However, for unknown reasons, they set these rates at levels that are predicted to generate $9.10 million in revenue (see Table A8) rather than the required $8.47 million (the difference between $14.93 million and $6.46 million, as shown in Figure 10). Thus, the LYRB-recommended rate structure is predicted to generate an extra $629,000 in revenue. This extra revenue from per-gallon charges reduces the percentage that comes from the base rates to 41.5 percent, still greater than the intended 37.5 percent. About 55 percent of the per-gallon revenue would come from commercial customers, but because these customers would be providing only 19 percent of the base revenue, their share of the total revenue comes to only 40 percent. Twenty percent of the average commercial customer’s water bill would be in the base rate, but for the average residential customer the base rate would account for 56 percent.
In addition to these logical inconsistencies, there are at least four reasons to be suspicious of the data and calculations in Figure 10 and Table A8:
* The count of 23,926 residential connections in Figure 10 is substantially higher than in the Master Plan or in the raw data that was provided to the Ogden City Council in January 2012. According to the raw data, there were never more than 22,852 residential connections during 2010, and it seems unlikely that more than a thousand residential connections could have been added during the intervening year. Reducing the count by 1000 would reduce the residential base rate revenue by a little over $200,000.
* In Table A8, the usage numbers in the row (tier) for 84,001+ gallons are suspiciously low. In the raw 2010 data that was provided to the city council, the corresponding numbers are comparable to those in the 42,001 to 84,000 tier, whereas in Table A8 they are consistently lower by an average factor of over 13. To produce such an extreme usage ratio between these tiers, the distribution of usage among customers would have to be highly irregular, yet in a way that is consistent from month to month. The most natural explanation is that the numbers in this row are simply wrong. Correcting this error could increase the residential per-gallon revenue by approximately $400,000.
* Ogden experienced an exceptionally cool, wet spring during 2011, so we would expect outdoor water use to have been quite a bit lower than average. Indeed, the 2010 data indicate that residential water usage was 4.2 percent greater during 2010 (a year of approximately average spring and summer rainfall) than during 2011--even after correcting the presumed error described in the previous item. A 4.2 percent increase in overall water use would generate about $400,000 in additional revenue.
* Table A8 does not actually apply the proposed rate structure. Instead it makes two simplifications, giving the no-secondary-water “discount” during the summer to all residents (even those with secondary water), and putting the top of the second “tier” at 42,000 gallons, rather than 12,000, during the winter. Correcting these errors adds about $100,000 to the predicted annual revenue.
Applying all four of the preceding modifications would raise the predicted revenue by approximately $700,000. The overall revenue would then be more than needed by approximately $1.3 million, and the overall rate increase during the coming year would be approximately 18 percent.
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