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3. Approve Contract - Kalispell Utility Rate StudyCity of Kalispell Public Works Department Post Office Box 1997, Kalispell, Montana 59903-1997 - Telephone (406)758-7720, Fax (406)758-7831 REPORT TO: Mayor and City Council FROM: James C. Hansz, P.E., Director of Public Works SUBJECT: Approve Contract, Kalispell Utility Rate Study MEETING DATE: September 3, 2002 BACKGROUND: A principle recommendation arising from the City's utility facility planning study is to perform a comprehensive utility rate study. This will ensure that funds are available to make the critical improvements that were identified in the facility plan. The fiscal year 2002/2003 budget includes appropriations totaling $85,000.00 in the water fund, sewer fund and storm drainage funds to perform this work. The City prepared an RFP/RFQ and three highly qualified firms were interviewed for this project. The firm of Economic and Engineering Services, Inc., of Bellevue, Washington was selected to perform the work. A detailed work scope and acceptable project cost have been negotiated for performing all the required work for each utility operation. The agreed schedule should have detailed rate recommendations before the City Council in time to support the 2003/2004 budget development process. The agreed cost of the work is $77,593.00. This is less than the funding appropriated for the project. RECOMMENDATION: Approve contract with Economic and Engineering Services, Inc., to perform comprehensive rate studies for water, sewer and storm drainage. ACTION REQUESTED: AT CITY COUNCIL MEETING OF SEPTEMBER 3 —MOTION TO APPROVEA CONTRACT WITHECONOMICAND ENGINEERING SERVICES OFBELLEVUE, WASHINGTONTO PERFORM COMPREHENSIVE RATE STUDIES. FISCAL EFFECTS: Expenditure of budgeted funds totaling $77,593.00. ALTERNATIVES: As suggested by the City Council Respectfully submittSA--, James C. Hansz, P.E. Chris A. Kukulski Director of Public Wor ty Engineer City Manager Report compiled August 28, 2002 Attachment: Proposed contract and work scope September 3, 2002 Approve Rate Study Contract AGREEMENT TO FURNISH CONSULTING SERVICES FOR THE KALISPELL UTILITY RATE STUDY For the consideration hereinafter set forth, Economic and Engineering Services, Inc., (hereinafter referred to as the CONSULTANT), agrees to provide economic, engineering and related analysis services as described herein to THE CITY OF KALISPELL (hereinafter referred to as the CITY) for a project generally described as the "THE KALISPELL UTILITY RATE STUDY." The project will involve all: economic review, engineering evaluation, rate analysis, design, and rate setting recommendations, policy reviews and recommendations, system development charge analysis and recommendations for revising same, reports, support for meetings, public presentations, and discussions and all other tasks related to the performance of a comprehensive rate and systems development charge study for Kalispell water, sewer and storm drainage systems. ARTICLE 1. SCOPE OF SERVICES The CONSULTANT agrees to provide required economic analysis, engineering, and related services for the CITY's Project. The services to be provided, and the compensation for such services, shall be as mutually agreed to in this Agreement, executed by both parties and as described in the attached Detailed Scope of Services. Unless otherwise indicated, execution of this Agreement by the CITY shall constitute notice to and authorization for the CONSULTANT to proceed with the services enumerated in the Agreement. ARTICLE 2. BASIS OF COMPENSATION A. BUDGET The budget for the Detailed Scope of Services of this Agreement has been agreed upon by the parties to this agreement. The Detailed Scope of Services, by this reference, is hereby made a part of this Agreement. B. COMPENSATION As consideration for providing the services described as: For the work detailed in the attached Detailed Scope of Services, the CITY shall pay the CONSULTANT for time and materials, as shown in the fee estimate, up to a total not to exceed $77,593.00. Pay requests shall be submitted and payment shall be made as described in Article 3 C. CHANGE OF SCOPE OR PERSONNEL The Detailed Scope of Services and its related budget for this Agreement shall be limited to the scope and budget so contained herein. Changes in the indicated Scope of Services shall be in accordance with the rates outlined in the Detailed Scope of Services and shall be implemented by a formal amendment to this Agreement. CONSULTANT shall notify CITY of any changes in personnel assigned to this project and shall obtain concurrence of CITY prior to such changes. D. ADDITIONAL SERVICES Additional services not specified in Article 1 and subsequently requested by the CITY shall be described and the cost thereof outlined in a formal amendment to this Agreement. Services required for the timely completion of work described in Article 1 but not specifically described in the Detailed Scope of Services shall not be considered as additional services for the purpose of this section. E. LITIGATION ASSISTANCE The CONSULTANT will not be obligated to provide expert witness or other litigation support related to its services, unless expressly agreed in writing. In the event the CONSULTANT is required to respond to a subpoena, government inquiry or other legal process related to the services in connection with a proceeding to which it is not a party, the CITY shall reimburse the CONSULTANT for reasonable costs and compensate the CONSULTANT at the rates shown in the Detailed Scope of Services for reasonable time incurred in gathering information and documents and attending depositions, hearings, and the like. ARTICLE 3. PAYMENT FOR SERVICES Payment to the CONSULTANT, as prescribed in Article 2, shall be made as follows: A. REQUEST FOR PAYMENT The CONSULTANT shall submit pay requests in a consistent detailed format. The submittal shall include a summary sheet to indicate total Professional Services, Reimbursable Expenses, Subcontracted Services and Total Payment Requested. Additional sheets shall be attached as necessary to describe hours worked and billable rates for each employee, itemized reimbursable expenses and itemized subcontracted services, including hours worked and billable rates for all subcontractors' employees. B. PAYMENT FOR SERVICES For all services described in Article 1 and subsequent amendments, payment is due within 30 days after the CITY's receipt of the CONSULTANT's pay request. Payment shall be for actual invoiced costs but shall not exceed the total amount shown in Detailed Scope of Services, subject to amendment as described in Article 2. ARTICLE 4. OBLIGATIONS OF THE CONSULTANT A. AUTHORIZATION TO PROCEED The CONSULTANT will not begin work on any of the services listed in Article 1 until the CITY directs him to proceed. Authorization to proceed on work elements not defined in this Agreement as to scope, cost, and time for completion shall be in the form of a formal amendment as previously described. The CONSULTANT will perform the services described in this Agreement and in amendments or change orders, which are issued under this Agreement and signed by both parties. In performing the services, the CONSULTANT will exercise the degree of care and skill ordinarily exercised by reputable companies performing the same or similar services in the same geographic area. The CONSULTANT is obligated to provide only those services, which are described in this Agreement, in amendments signed by the CONSULTANT or in change orders signed by the CONSULTANT C. CONFIDENTIAL INFORMATION Confidential information shall be designated as such by the CITY. The CONSULTANT and his subcontractors will not disclose confidential information provided by the CITY or developed by the CONSULTANT and his subcontractors in the course of its services without the CITY's specific prior written consent. ARTICLE 5. OBLIGATIONS OF THE CITY A. AUTHORIZATION TO PROCEED The CITY shall authorize the CONSULTANT to proceed on the tasks detailed in the Detailed Scope of Services by executing this Agreement. 10�41Iy`aI NRNIW:111 OM The CITY shall provide to the CONSULTANT all technical data in the CITY's possession, including previous reports, records and all other information required by the CONSULTANT and relating to the CONSULTANT's work on the project. Such information shall include, but not be limited to, the CITY's requirements for the project, any rate criteria or constraints, and copies of rates, charges, policies or other data that CITY requires to be included. The CONSULTANT may rely upon the accuracy, timeliness, and completeness of the information provided by the CITY in performing CONSULTANT's services to the CITY. C. ACCESS TO FACILITIES AND PROPERTY The CITY shall make its system facilities and properties available and accessible for inspection by the CONSULTANT and provide labor and such equipment as reasonably required by the CONSULTANT and as authorized by CITY. D. ACCESS TO PRIVATE PROPERTY The CONSULTANT shall obtain permission for access from individual property owners, as necessary to perform required services on private property. �IuI"W&3WFJIMT11 The CITY shall examine all reports, analyses, proposals, and other documents presented by the CONSULTANT, obtain advice of an attorney, insurance counselor, accountant, auditor, and other consultants as the CITY deems appropriate for such examination and render in writing decisions pertaining thereto in a timely manner so as to not delay the services of the CONSULTANT. F. PROMPT NOTICE The CITY shall give prompt written notice to the CONSULTANT whenever the CITY observes or otherwise becomes aware of any development that affects the scope or tinning of the CONSULTANT's services or any defect in the work of the CONSULTANT or Contractors. ARTICLE 6. GENERAL LEGAL PROVISIONS A. FORCE MAJEURE The CITY shall not be responsible for any delay or failure of performance caused by fire or other casualty, labor dispute, government or military action, transportation delay, inclement weather, Act of God, act or omission of CITY or its contractors, failure of CITY or any government authority to timely review or to approve the services or to grant permits or approvals, or any other cause beyond the CITY'S reasonable control. B. INDEMNIFICATION Indemnification by CITY. - The CITY agrees to indemnify, hold harmless and defend the CONSULTANT from and against any and all liabilities, demands, claims, causes of actions and judgments (including costs and reasonable attorneys fees) which the CONSULTANT may incur, become responsible for or pay out as a result of death or bodily injury or threat thereof to any person, destruction of or damage to any property, contamination of or adverse effect on natural resources or the environment, any violation of local, state, or federal laws, regulations or orders, or any other damages claimed by third parties, including without limitation any arising out of or related to hazardous materials or substances and including costs of response or remediation arising out of the application of common law or laws imposing strict liability, based on or arising in whole or in part from the negligent acts or omissions or willful misconduct of the CITY, its employees, agents and subcontractors. Indemnification by CONSULTANT: The CONSULTANT agrees to indemnify, hold harmless and defend the CITY from and against any and all liabilities, demands, claims, causes of actions and judgments (including costs and reasonable attorneys fees) which the CITY may incur, become responsible for or pay out as a result of death or bodily injury or threat thereof to any person, destruction of or damage to any property, contamination of or adverse effect on natural resources or the environment, any violation of local, state, or federal laws, regulations or orders, or any other damages claimed by third parties, including without limitation any arising out of or related to hazardous materials or substances and including costs of response or remediation arising out of the application of common law or laws imposing strict liability, based on or arising in whole or in part from the negligent acts or omissions or wfful misconduct of the CONSULTANT, its employees, agents and subcontractors. C. INSURANCE The CONSULTANT shall acquire and maintain statutory workmen's compensation insurance coverage. CONSULTANT shall acquire and maintain bodily injury and property damage insurance coverage in an amount not less than seven hundred fifty thousand ($750,000) dollars for each claim and one and one-half million ($1,500,000) dollars per occurrence. The CONSULTANT shall acquire and maintain bodily injury liability automobile insurance coverage in an amount not less than seven hundred fifty thousand ($750,000) dollars for each claim and one and one- half million ($1,500,000) dollars per occurrence and property damage liability automobile insurance coverage in the amount of fifty thousand ($50,000) dollars for each occurrence. The CONSULTANT shall acquire and maintain catastrophe or excess insurance coverage in the amount of one million (1,000,000) dollars for each occurrence and one million (1,000,000) dollars for each aggregate with ten thousand ($10,000) dollars deductible amount. The CONSULTANT shall acquire and maintain professional liability insurance coverage in the amount of one million ($1,000,000) dollars with a fifty thousand ($50,000) dollar deductible amount. D. TERMINATION The CITY for its convenience may terminate this Agreement by giving 30 days' written notice to the CONSULTANT. This Agreement may be terminated by either parry upon 30 days' written notice should the other party fail substantially to perform in accordance with this Agreement through no fault of the other or if the project is stopped by conditions beyond the control of the CITY. In the event of termination, the CONSULTANT shall be paid in full for all work previously authorized and performed up to the termination date, plus termination expenses if termination is not caused by failure of the CONSULTANT to perform If no termination is implemented, relationships and obligations created by this Agreement shall terminate upon completion of all applicable requirements of this Agreement. E. SUSPENSION, DELAY, OR INTERRUPTION OF WORK The CITY may suspend, delay, or interrupt the work of the CONSULTANT on the project for the convenience of the CITY or for reasons beyond the control of the CITY or CONSULTANT. In the event of such suspension, delay, or interruption, an adjustment in compensation due the CONSULTANT shall be made for all increases in cost of the CONSULTANT's performance under this Agreement, including personnel relocation and/or replacement costs, and all other identifiable labor and expense costs. F. ASSIGNMENT This Agreement is to be binding on the heirs, successors, and assigns of the parties hereto and is not to be assigned by either party without first obtaining the written consent of the other. No assignment of this Agreement shall be effective until the Assignee assumes in writing the obligations of the assigning party, and delivers such written assumption to the other original party to this Agreement. Use of subconsultants by the CONSULTANT for technical or professional services shall not be considered an assignment of a portion of this Agreement. Nothing herein shall be construed to give any rights or benefits hereunder to anyone other than CITY and CONSULTANT. G. LITIGATION In the event either party to this Agreement shall be required to bring an action against the other party to enforce this Agreement, or any portion thereof, the prevailing party shall be entitled to reasonable attorney fees and costs therefore in addition to any damages that may be awarded. H. VENUE In the event of litigation concerning this Agreement, venue shall be in the Eleventh Judicial District in and for the County of Flathead, Montana, and this Agreement shall be governed by the laws of the State of Montana both as to interpretation and performance. ARTICLE 7. GENERAL PROVISIONS A. ACCESS TO DOCUMENTS The CONSULTANT shall provide access to any of the documents relating to this project to the CITY, the City of Kalispell, or authorized representative of the above during normal working hours. B. RECORDS The CONSULTANT shall maintain project and financial records for this project for at least three years after final payment and closure of the project. C. REPRODUCIBLE COPIES Reproducible copies of reports, recommendations and other documents shall be made available to the CITY upon request. D. COVENANT AGAINST CONTINGENT FEES The CONSULTANT wan -ants that he has not employed or retained any company or person, other than a bona fide employee working solely for the CONSULTANT, to solicit or secure this Agreement, and that he has not paid or agreed to pay any company or persons, other than a bona fide employee working solely for the CONSULTANT, any fee, commission, percentage, brokerage fee, gifts, or any other consideration, contingent upon or resulting from the award or making of this Agreement. For breach or violation of this warranty, the CITY shall have the right to annul this Agreement without liability, or in its discretion to deduct from the contract price or consideration, or otherwise recover, the full amount of such fee, conunission, percentage, brokerage fee, gift, or contingent fee. E. SCHEDULE All work for the design of the THE KALISPELL UTILITY RATE STUDY shall be completed in accordance with and to meet the milestones designated on the schedule included in the Detailed Scope of Services, as it may be amended to reflect the actual date of notice and authorization to proceed as outlined in Section 1. ARTICLE 8. ATTACHMENTS, SCHEDULES, AND SIGNATURES l:WIfi190OUT10zIs11WO) 31W016 l This Agreement (consisting of pages I through 8, inclusive) and attached Scope of Services, fee and manhour estimate, and schedule constitute the entire Agreement between the CITY and the CONSULTANT and supersedes all prior written or oral understandings. This Agreement may only be amended, supplemented, modified, or canceled by a duly executed written addendum. DATED this day of 2002. CITY OF KALISPELL Uz Chris A. Kukulski, City Manager ENGINEERING and ECONOMIC SERVICES, Inc. am Thomas E. Gould, Vice President 1.1 Introduction The City of Kalispell (City) has requested technical assistance in conducting a comprehensive water, sewer and storm drainage rate study. The ultimate goal of this study is to assure the adequate funding of each utility's O&M and capital needs, while developing rates that are fair and equitable. In order to accomplish that goal a comprehensive rate study must be conducted for each utility. At the end of that process, water, sewer and storm drainage rates will be recommended that meet the financial objectives of the City and which are cost -based and equitable. In addition to conducting a comprehensive rate study for each utilit the City also desires to review and u date the "The ultimate goal of this study is to assure the adequate funding of each utility's O&M and capital needs, while developing rates that are fair and equitable." Y p system development charges (SDC's) for each utility. The purpose of SDC's is to equitably assign the costs of infrastructure related to growth to those new customers connecting to the system and creating the need for expanded infrastructure. By maintaining cost -based SDC's, existing customers may be sheltered from the costs related to growth. Provided within this section of the proposal is a detailed discussion of our proposed scope of services to conduct comprehensive water, sewer and storm drainage rate and system development charge studies for the City. 1.2 Overview of a Comprehensive Rate Study A comprehensive rate study is generally comprised of three interrelated analyses: (1) the development of revenue requirements to determine adequate funding levels, (2) a cost of service study designed to understand the cost differences associated with serving various types of customers, and (3) a rate design analysis that establishes a cost -basis for setting fixed and variable rates. Provided below in Table 14 is a brief overview of the rate study process. Revised Scope at Services '1 City of Kalispell Revenue Requirement Analysis Cost of Service Analysis Rate Design Analysis Compares the sources offunds (revenues) to the expenses of each utility to determine the overall adjustment to rates. Allocates the total revenue requirements to the various customer classes of service in a `fair and equitable" manner Design rates to yield the revenue requirements and meet the goals and objectives of the City. While Table 1-1 provides an overview of the typical components of a comprehensive water, sewer and storm drainage rate study, an important aspect of this study is incorporating and "tailoring" those analytical elements into an overall scope of services that will provide the work products being requested by the City. Provided below is detailed discussion of how this basic analytical framework will be tailored to meet the City's needs. 1.3 Detailed Description of Proposed Scope of Services EES has attempted to develop a detailed scope of services that meets the specific goals and objectives of the City. More importantly, the scope of services outlined below, provides the City with a better understanding of our depth of knowledge and skills in conducting comprehensive rate studies. In developing the proposed scope of services, two items should be noted. First, it is assumed that each of the analyses (water, sewer and storm drainage) will be conducted simultaneously. The second item to note is that the scope of services to conduct the water, sewer and storm drainage analyses are assumed to be identical, except where noted. Task 1—Initial Kick -Off Meeting (Project Meeting) Task Objective: Bring the Consultant, utility/City management and staff together, at the start of the project, to assure that both parties have a mutual understanding of the goals, objectives, issues and concerns related to the study. The initial kick-off (project) meeting is important to the overall success of this engagement since it forms the foundation for the rate study process. The initial project meeting is used as a starting point in developing a strong working relationship between EES and the City. At the same time, this meeting allows both parties to discuss the overall goals and objectives for this study, while at Revised Scope of Services y City of Kalispell the same time discussing any issues and concerns that either party may have. It is proposed that the initial project meeting be approximately 2-hours in length. Expected City Staff Support for Task 1: For this task, the City will be expected to: < Have their key management/project team members attend a half -day planning meeting. Work Product Deliverables as a Result of Task ]-Initial Kick-off Meeting. From the work accomplished above, the deliverables for this optional task will be as follows: • Identification of objectives, issues and concerns by both parties. • Face-to-face meeting to get the study off to a positive start. Task 2—Data Collection Task Objective: Review and assess the City's existing water, sewer and storm drainage data, and provide a written data request detailing the data required to complete the study. The initial written data request details the data and information required to conduct the study. EES will provide a written data request to the City prior to the initial kick-off meeting so that it can be discussed at the meeting and any problem areas quickly resolved. The data and information requested for this study "The data and information should be, for the most part, readily available information (e.g. requested for this study financial, statistical, customer, etc.). The key issue for data should be, for the most part, collection purposes may be the level of detail that is readily readily available information (e:g. financial, available and needed for the study. It is important to keep in statistical, customer, eta)." mind that a cost of service study requires data and information SEEN that is more detailed than the data typically reported for annual financial statement purposes. For those areas where the data is not readily available, or will require significant labor and expense on the City's part to provide, EES and the City will determine the "sensitivity" or "importance" of the data required and if alternative data sources are available. As with any study, it is imperative that the City provide a timely response for the data requested. Expected City Staff Support for Task 2: For this task, the City will be expected to: <_ Gather the data requested in the written data request provided by EES. (Note: typically requires 20 — 40 hours of total staff time to provide.) Work Product Deliverables as a Result of Task 2-Data Collection. From the work accomplished above, the deliverables for this task will be as follows: • An initial written data request to the City. • Identification of any data constraints. Revised Scope of Services 3 City of Kalispell Task 3—Review of Key Performance Indicators Task Objective: Review the City's key performance indicators and compare to other comparable utilities to provide an overall measure of the effectiveness of the City's management in the utilization of labor and control of costs. The City desires to have an assessment of their management performance relation to other comparable utilities. To accomplish this task, EES will develop a series of key performance indicators for each utility that will view items such as: • Employees/Mile of Lines • O&M Expenses/Customer • Customers/FTE • System Losses (Water Only) • Labor $/Miles of Line • Debt Service/Customer • Total Costs/Units Sold • Production Costs The above performance indicators are provided as examples only of the type of indicators to be developed. Final performance indicators will be dependent upon the availability of data and information from the City and the selected utilities for comparison purposes. The City's performance will be compared to other Montana utilities, and other comparable utilities across the U.S. While these comparisons will never be "apples to apples" they will provide a solid understanding of the effectiveness of the City's operations. It is important to note that this task is not a "management audit." Rather, this is a comparison or benchmarking analysis. Expected City Staff Support for Task 3. For this task, the City will be expected to: <_ Provide data and information for the performance indicators. Work Product Deliverables as a Result of Task 3—Review of Key Per Indicators From the work accomplished above, the deliverables for this task will be as follows: • A comparison of key performance indicators for the City and comparable utilities. Task 4—Review of Existing Financial Policies, Philosophies and Practices Task Objective: Determine the extent of any financial/rate setting policies, philosophies or practices in use by the City and recommend additional policies/practices as appropriate. One portion of our scope of services that we believe sets EES apart, is our emphasis on developing financial policies/practices around which rates should be set. We emphasize this aspect of the rate setting process for two reasons. First, we believe that a utility should be run in a business -like manner, and therefore, should be managed in a financially prudent manner. As such, financial policies should be established accordingly. These policies may include issues such as maintaining minimum reserve levels, meeting target debt service coverage requirements, properly funding an amount for renewals and replacements, establishing methods to determine general fund transfers, etc. The other reason for emphasizing this aspect of the process, is that by Revised Scope of Services 4 City of Kalispell developing financial (rate setting) policies, the City is taking a step towards stability in the decision making process. That is, the policies are adopted based upon prudent financial management of the utility, and decisions should not necessarily be driven by the politics or timing ':.. we believe that a utility should be run in a business- like manner, and therefore, should be managed in a financially prudent manner. As such, financial policies should be established accordingly." of the process. While adopting financial policies/practices for the rate setting process will never eliminate the politics of the process, in our opinion, it will help to minimize the politics inherent to setting rates. As a part of this Task, EES will review the existing financial/rate policies and practices of the City to ensure conformance with those policies. At the same time, EES will propose and recommend, as appropriate, additional financial/rate policies for possible adoption by the City. All analyses developed as a part of this study will conform to the City's existing financial/rate policies, or will be based upon "generally accepted" financial/rate practices of the utility industry. Expected District Staff Support for this Task. For this task, the City will be expected to: <_ Gather existing policies and provide to EES. Discuss any existing financial/rate philosophies or practices. <_ As needed, provide clarification of existing policies. <_ As needed, assist EES is developing recommended policies for possible adoption. Work Product Deliverables as a Result of Task 4—Review of Financial Policies, Philosophies and Practices. From the work accomplished above, the deliverables for this task will be as follows: • Review of the existing financial/rate setting policies and practices of the City. • Develop additional policies/practices to help provide financial stability to the City and aid in simplifying the financial planning and rate setting process over the long-term Task 5—Revenue Requirement Analysis Task Objective: Using a generally -accepted rate setting methodology, develop the City's water, sewer and storm drainage revenue requirements for a projected five year period while ensuring adequate funds for operating and capital needs. "This task considers the The development of the water, sewer and storm drainage prudent and proper revenue requirement analyses is the first major analytical portion fun dingforO&M and of the comprehensive rate study process. This portion of the capital expenditures for study entails reviewing, for each utility, the various sources of the City ... " funds (revenues) and comparing them to the applications of funds (expenses) for the utility. This task considers the prudent and proper funding for O&M and capital expenditures for each utility, and determines the need for any rate adjustments over the time period selected. A more detailed discussion of the various Revised Scope of Services City of Kalispell H steps involved in developing the City's revenue requirements for each utility is provided below. STEP 1 — SELECTION OF A TEST PERIOD — The first step in the development of the revenue requirements is the selection of a "test period". A "test period" refers to a time frame of reference for the accumulation of revenues, expenses and consumption data. In this case, a five-year projected time period is proposed (e.g. 2003 — 2007). By reviewing costs over this extended time frame, the City can determine if any major rate impacts are on the horizon and potentially take steps today to help minimize future impacts (e.g. rate adjustment transition, accumulation of capital reserves, etc.). STEP 2 — METHOD OF ACCUMULATING COSTS — Once the "test period" has been determined, the next decision is to determine the basis or method of accumulating costs. There are two choices for accumulating costs for revenue requirement/financial planning purposes; the "cash" or "utility/accrual" basis. Table 1-2 provides a simple comparison between these two "generally accepted" methodologies. Utility/Accrual Basis Cash Basis + O&M Expense + Taxes or Transfer Payments + Annual Depreciation Expense + Return on Rate Base (Investment) = Revenue Requirement + O&M Expense + Taxes or Transfer Payments + Capital Projects Financed with Rate Revenues (>_ Deprec. Exp.) + Debt Service (P+I) = Revenue Requirement Two items should be noted from the above table. First, the terms "cash" and "accrual" used in the table are not the same terms used in the accounting sense. These terms, as used for rate setting purposes, relate to the cost components to be included within the revenue requirements. The second important point that should be made concerning the above table is that in practice, the "cash" basis approach is most commonly used by public (municipal) utilities for determining and setting their revenue requirements since this closely follows their budgeting process. This is the methodology EES would recommend to establish revenue requirements for the City. STEP 3 — ACCUMULATION OF REVENUES AND EXPENSES — Once the test period and method of accumulating costs has been determined, EES in conjunction with City management and staff, will develop the test period revenue requirements for each utility. Revenue requirements are composed of two major types of costs; operational and capital expenses. The operational costs are generally projected from historical or budgeted costs, using assumed escalation factors, and adjusted for any known changes in operations (e.g. additional personnel, growth/expansion, etc.) While the projection of the operational costs is fairly straightforward, the capital cost projections are generally the focus of the analysis, and require more thought and planning. aevisee scope of services 6 City of Kalispell `:.. consideration must be given to maximizing the capital improvements (expenditures) for the system, while at the same time, minimizing rates to its Within this study, the starting point for projecting capital costs (expenditures) will be the Kalispell Facility Plan 2000 document, and any other relevant capital planning and capital budgeting documents. In the financial planning process, consideration must be given to maximizing the capital improvements (expenditures) for the system, while minimizing rates to its customers. This is accomplished in a variety of ways. However, the most important aspect of this discussion is that there are multiple methods of financing capital expenditures, and it is through this process that rates can be minimized. Table 1-3 provides an overview of the general approach that is used to develop a capital expense plan for the revenue requirement analysis. + Total Capital Projects — ✓ Replacement and Refurbishment Capital Projects ✓ Legally Mandated Capital Projects ✓ System Growth and Expansion Capital Projects — Outside Funding Sources — ✓ Capital Reserves ✓ Grants ✓ Low -Interest Loans (State and/or Federal) ✓ System Development Charges (SDCs)/(Contributed Capital) ✓ Short -Term Borrowing ✓ Borrowed Funds/Long Term Debt (e.g. Revenue Bond) Capital Projects Financed with Rate Revenues (> Deprec. Exp.) The basic framework shown above is developed on a year -by -year basis for each of the projected five (5) years of the water, sewer and storm drainage revenue requirement analysis. In summary form, the general approach is to list all water, sewer and storm drainage capital projects in each year, and then determine the various outside funding sources for each of the projects. These outside funding sources may be low -interest loans, grants, customer capital contributions, system development charges, etc. The balance of projects not funded by the available sources of funds must be financed from a combination of long-term debt and rates. It is the balancing of the use of long-term debt to the impact upon rates, which is critical to the analysis. In balancing the use of debt to equity (rate) financing of capital projects, a number of financial planning aspects are taken into account. First, the utility's debt service coverage ratio is an important financial measure or indication of the utility's ability to repay debt. The strength of the debt service coverage ratio is a direct function of the amount of capital projects that are financed from rate revenues. At a minimum, we assume that a utility should fund an amount equal to or Revised Scope of Services 7 City of Kalispell greater than the utility's annual depreciation expense for renewal and replacement capital projects. By following this simple financial rule, the utility is not only assured of a strong debt service coverage ratio, but at the same time, it assures that existing plant in service will be maintained at acceptable service levels. By properly funding for this component of the capital projects, it should provide the utility with greater flexibility in its ability to borrow for capital projects. In summary, given a better understanding of the overall magnitude of the needed capital projects, a final financing plan can be developed which meets the City's goals and objectives for each utility, while attempting to minimize rates and costs over time. Expected City Staff Support far Task S: For this task, the City will be expected to: < Provide "as needed" assistance, via email and telephone, to explain the City's data and information as it relates to developing the revenue requirements _< Provide "as needed" data refinements or additional data needs as determined during the process of developing the revenue requirements < Attend a one-half day project meeting to review the draft revenue requirement analysis Work Product Deliverables as a Result of Task 5 — Development of the Revenue Requirement Analysis From the work accomplished above, the deliverables for this task will be as follows: • A projected water, sewer and storm drainage revenue requirement analysis for a projected 5-year period that considers the necessary operating and capital needs of each utility. • A capital financing plan within the revenue requirement analysis, utilizing the City's comprehensive plans or capital budget, which attempts to maximize capital expenditures, while minimizing the impacts to customers over time. • If needed, a transition plan to `phase in" any needed rate adjustments. • Recommendations regarding key financial indicators (debt service coverage, capital replacement, reserve levels, etc.). Task 6—Cost of Service Analysis Task Objective: Develop an average embedded cost of service study to equitably allocate the revenue requirements of the water, sewer and storm drainage systems to the customers served by the City. Given the results of the revenue requirements, the City's water, sewer and storm drainage costs will be allocated to the various customer classes of service using an average embedded cost of service methodology. In simplified terms, a cost of service study attempts to equitably allocate the revenue requirements of each utility between the various customer classes of service (e.g. residential, commercial, etc.). A brief discussion of the major steps associated with a water, sewer and storm drainage cost of service analysis is provided below. STEP I — SELECTION OF TEST PERIOD — The first step of a cost of service is to select a time period for the allocation of Revised Scope of Services City of Kalispell `In simphfted terms, a cost of service study attempts to equitably allocate the revenue requirements costs. This is similar to the revenue requirement time period selection process noted above. A cost of service analysis typically reviews a 1 to 2 year period, or the period over which water, sewer and storm drainage rates will ultimately be set. In the City's case, allocating the year 2003 revenue requirements for each utility for cost of service purposes would appear to be appropriate. STEP2 — FONCTIONALIZATIONAND CLASSIFICATION OF EXPENSES— The next step in the cost of service analysis is to functionalize the data. Functionalization refers to the arrangement of cost data into its basic cost categories (e.g. for the water utility, source of supply/production, treatment, transmission, distribution, etc.). This task is simplified greatly through the City's use of a uniform system of accounts. Given fiurctionalized costs, the costs are then classified to their various cost components. For the water utility, classification involves determining whether each specific cost or account item was incurred to meet a consumer's capacity, commodity, fire protection or customer related need. In contrast, for the sewer utility, classification involves determining whether each specific cost or account item was incurred to meet a consumer's volume, strength or customer related need. For the storm drainage utility, the two main cost drivers are volume flows and customer related costs. While the basic cost components noted above for each utility are the cornerstone to the analysis, they are by no means the only cost components to be utilized for each of the studies. A thorough review of the various types of costs that the City incurs for each utility will be undertaken and specific cost classifiers developed. Classification will be based upon generally accepted cost of service techniques. STEP 3 — DETERMINATION OF CLASSES OF SERVICE — Development of the cost of service for each utility begins with determining the classes of service that will be used for purposes of establishing cost allocations and rates. The process of establishing classes of service is to group customers into homogeneous groups. That is, customers with similar usage and/or facility requirements. In reviewing the City's water and sewer rates, it was noted that the City has a single rate schedule for both utilities. Therefore, EES will need to establish classes of service in order to conduct the cost of service analysis. EES will first discuss this issue with the City to determine the City's overall objectives. Given that understanding, EES will then review the data and information that is available for each utility on the various customer classes of service to determine final classes of service for cost allocation purposes. These will be based upon grouping customers with similar facility requirements and usage patterns for each customer group (e.g. residential, commercial, etc.). Revised Scope of Services 9 City of Kalispell STEP4—ALLOCATION OFEXPENSES — The next analytical process involved in each of the cost of service analyses is the allocation of the classified rate base and expenses to each of the customer "The summary page for the cost of service study compares the difference between the current level of rate revenues received from each class of service, and the allocated cost of service for each class. " classes of service. Once the classes of service have been determined, the process of developing allocation factors is undertaken. In developing the allocation factors, EES will develop factors that are "fair and equitable" to all customers, and which rely upon City specific data where available. STEP 5 — SUMMARY OF THE COST OF SERVICE — Given the development of all the allocation factors, the final task allocated the rate base and expenses to each class of service. From this process, a summary page of the cost of service study for each utility is provided. The summary page for the cost of service study compares the difference between the current level of rate revenues received from each class of service, and the allocated cost of service for each class. The cost of service will also provide average unit costs, or cost -based water, sewer and storm drainage rates, which are important to the development of final rate designs. Average unit costs provide the City with an understanding of the cost/rate relationship between fixed and variable costs. In summary, the development of average unit costs will provide "cost of service" based water, sewer and storm drainage rates for all classes of service for the City. Expected City Staff Support for this Task. For this task, the City will be expected to: _s Attend a half -day project meeting to review the findings and results of the cost of service analyses for each utility. < Provide any "as needed" data refinements or additional data needs as determined during the process of developing the cost of service analysis Work Product Deliverables as a Result of Task 6 — Cost of Service Analysis. From the work accomplished above, the deliverables for this task will be as follows: • Review of the current customer classes of service for the water, sewer and storm drainage utility's and determine any revisions for cost allocation purposes • A "fair and equitable" allocation of the revenue requirements to the various classes of service for the City's water, sewer and storm drainage systems. • A summary of the average unit costs (cost based rates) for the various customer classes of service for the water, sewer and storm drainage utilities. Task 7—Rate Design Analysis Task Objective. Utilize the cost information developed as a part of the previous tasks and develop water, sewer and storm drainage rate design options for possible adoption by the City Council. Revised Scope •f Services 10 City of Kalispell A starting point for the water, sewer and storm drainage rate design process is understanding the rate design goals and objectives the City is striving for in this study. These objectives may include ease of administration, simplicity, revenue stability, efficient use, etc. Understanding the City's rate design objectives will assist EES in the development of any needed water, sewer and storm drainage design alternatives. At the present time, the City has water and sewer rates, while the storm drainage rates are collected on a property assessment basis. As a part of this study, EES will provide a recommendation on whether the storm drainage costs should be collected via monthly rates or annual property assessments. However, it is important to understand that regardless of the method of collecting the storm drainage costs (monthly fees or annual property assessments) rates still need to be developed to properly charge each customer for the service provided. In designing the water, sewer and storm drainage rate options for the City, the cost of service information and average unit cost information for each utility will be utilized as a starting point. As a part of this task, the City's present rate designs for each utility will be reviewed to ensure that they conform to contemporary rate -setting goals and objectives. EES will review the rate objectives of the City and provide rate alternatives for each utility that will meet those objectives. For each rate design developed, a bill comparison and graph will be provided that shows a comparison between the present bill and the proposed bill at various levels of usage. Bill comparisons are useful in assessing the potential impacts to a wide variety of customers. A comparison of neighboring water, sewer and storm drainage utilities will also be provided for the proposed rate designs. Expected City Staff Support for this Task. For this task, the City will be expected to: _< Discuss with EES the City's rate design goals and objectives <_ Review rate design alternatives for appropriateness Work Product Deliverables as a Result of Task 7 — Rate Design Analysis. From the work accomplished above, the deliverables for this task will be as follows: • Review of the City's current water, sewer and storm drainage rates and development of various rate design alternatives • Bill comparisons and graphs for the rate design alternatives developed. Task 8—Review and Update System Development Charges Task Objective. Review the City's water, sewer and storm drainage system development charges and update to consider the City's current facilityplans for each utility. EES as part of this task will review and update the City's water, sewer and storm drainage system development charges. The system development charges will be calculated based on the cost and value of unused system capacity in the City's systems as well as associated capital improvements necessary to serve new development. Revised Scope of Services 77 City of Kalispell In developing the methodology to be used to analyze the City's SDC's for each utility, EES will meet with City staff to review the previous methodology used to establish the City's SDC's. At the same meeting, a discussion can be held regarding any modifications that may be needed to each methodology to assure that the proper costs are captured and recovered in this process. Various options for valuation of the existing systems will be reviewed. These will include original cost, depreciated original cost, depreciated replacement value, as well as original cost adjusted for the associated carrying cost of the excess capacity investment. EES will also review options associated with allocation of capital improvements to serve growth. Generally two options are available: the incremental method and the proportional method. The incremental method assigns the cost of project replacements to existing development based on the additional cost incurred in over -sizing of the facilities. The proportional method would assign the cost to existing and new development based on the proportional amount of capacity. An example of the incremental method is to look at the cost of upsizing a 6-inch line to a 12-inch line. It is anticipated that the methodology and key issues will be resolved very early on in the study process to assure that the appropriate data is developed and incorporated into the SDC methodology. As a part of the study process, EES will review any associated credits required to be given to new development to assure that they do not "pay twice'; that is, once through rates and once through the SDC charge. This will include review of any general obligation issues which are paid by property taxes and hence are paid for whether or not the user has been paying through water rates or not. Additionally, any associated debt, which may be paid for through revenue bond issuances, will also be reviewed for applicable credits. Given the nature and complexity of these charges, EES will prepare a separate report discussing the establishment of the SDC's for the water, sewer and storm drainage utilities. Given the legal implications of establishing SDCs, it is better filed as a report separate from the rate study report. Three (3) copies of the draft SDC reports will be submitted to the City for review and comment. Fifteen (15) copies of the final SDC reports will be provided to the City. Expected City Staff Support for this Task. For this task, the City will be expected to: S Discuss with EES the City's "growth" related projects <_ Review the proposed methodology and resulting SDC's for appropriateness Work Product Deliverables as a Result of Task "ystem Development Charge Methodology. From the work accomplished above, the deliverables for this task will be as follows: • System development charges for the water, sewer and storm drainage utilities which are cost -based, equitable and legally defensible. • Separate reports outlining the findings, methodology and system development charges. Three (3) copies of the draft SDC report will be provided and fifteen (15) copies of each final report will be provided to the City. Revised Scope of Services 12 City of Kalispell Task 9—Work Papers and Report Documentation Task Objective: Provide a well -written report to summarize the findings, conclusions and recommendations of the rate study. In addition, provide a copy of all workpapers associated with the project to aid in future updating of the study by City staff. Upon completion of the rate analysis, EES will develop a draft written report of the rate study. The written report is intended to be comprehensive in nature and document all of the activities undertaken as a part of the project, along with our findings, conclusions and recommendations. Within all of our reports, EES provides technical appendices of all the technical analyses undertaken. EES will provide three (3) copies of the draft final report to the City for their review and comment. Any comments, suggestions or corrections from the City concerning the draft final report will be incorporated into the final report. Fifteen (15) copies of the final report will be provided to the City. Additionally, complete documentation of all workpapers used in the preparation of the utility rate study will be provided to the City. This should facilitate subsequent updating by City staff with limited input from outside consultants. Expected City Staff Support for this Task. For this task, the City will be expected to: <_ Review and comment on the draft written report Work ProductDeliverabhx as a Result of Task 9 — Work papers and Report Documentation From the work accomplished above, the deliverables for this task will be as follows: • A draft and final written report • A copy of all workpapers used in the preparation of the study Task 10—Meetings/Workshops/Public Presentations Task Objective: Provide effective public presentations of the findings, results and recommendations of the study. The overall quality and value of a rate study is often measured by the quality of the public presentation process. In addition, the ability of the consultant to present this technical material in a manner that is easily understandable to the City Council and public is paramount. EES excels in this aspect of the study. EES would suggest up to six meetings with the City Council "The overall quality and and the public. The first meeting, EES would recommend value of a rate study is meeting with the City Council and providing a "Rates 101" often measured by the workshop. This meeting would provide an overview of the quality of the public rate setting principles and methodologies to be used in this presentation process." study. Ideally, this meeting would be scheduled to MEN _M correspond to the initial project meeting (Task 1). The next meeting would be a workshop to discuss the City's financial policies for rate setting and discuss Revised Scope of Services 13 City of Kalispell possible new policies for possible adoption by the City. The third meeting would also be a workshop and discuss the results of the performance indicator study, along with the results of the water, sewer and storm drainage revenue requirements and cost of service. From that meeting, EES would gain policy direction from the City Council as it relates to moving forward with final rate designs. The fourth meeting with the City Council would review the various alternative rate designs for possible adoption. The City Council could narrow their options for a final public hearing. The fifth meeting would review the development of the proposed system development charges. Finally, the sixth meeting would be a formal City Council meeting to have a public hearing on the proposed rates and SDC's. Throughout this project, EES will schedule, as appropriate, project meetings with the City staff to keep them abreast of the progress of the study and to assure that the assumptions and methodology used within the study are consistent with the City's thinking. Throughout this engagement, EES will undertake to provide as much educational services to the City's staff members as possible. This "transfer of knowledge" should allow for subsequent analysis and updates of these studies with little or no outside technical assistance. Expected City Staff Support for this Task. For this task, the City will be expected to: <_ Review and comment on any proposed handouts for public meetings Work Product Deliverables as a Result of Task 10 — Meetings/WorkshopwPublic Presentations From the work accomplished above, the deliverables for this task will be as follows: • Up to six (6) workshops/public presentations with the City Council during the rate study process to gain policy direction and present the results to the public. Task 11—Computer Models Task Objective: Provide a copy of all models developed as apart of this study. The financial/rate model developed for the City will be provided at the end of the study. The model will be developed using the spreadsheet program of the City's choice (e.g. Excel, Lotus, etc.). Expected City Staff Support for this Task: For this task, the City will be expected to: <— Select the City's preferred spreadsheet program Work Product Deliverables as a Result of Task 11 — Computer Models From the work accomplished above, the deliverables for this task will be as follows: • A copy of the computer spreadsheet model used to develop the City's study. This concludes the discussion of the scope of services for the City. Revised Scope of Services 14 City of Kalispell 2.1 Introduction This section of the proposal will provide a detailed discussion of our proposed time schedule, hourly billing rates and the estimated labor hours for the project. These proposed items are based upon our understanding of the City's needs and may be negotiated and adjusted to meet the specific needs of the City. 2.2 Estimated Time Schedule Provided below in Exhibit 2-1 is an estimated project time schedule. This schedule is based upon our best estimate of the time required to adequate review the issues associated with the City's rates and provide a quality work product. I Initial Project Meeting 2 Data Collection 3 Performance Ind. 4 Financial Policies 5 Revenue Requirement Analysis 6 Cost of Service Analysis 7 Rate Design Analysis 8 System Development Charges 9 Written Reports 10 Public Presentation 41 11 Computer Model 5.3 EES Hourly Billing Rates KBYlaea *cope of Services is City of Kalispell Economic and Engineering Services, Inc. (EES) utilizes the following hourly billing rates. These rates were effective as of January 1, 2002. PrincipalN.P. $140.00/hr $150.00/hr Associate Analyst 7 $118.00/hr $144.00/hr Financial Manager 6 105.00/hr 129.00/hr Sr. Financial Analyst 5 92.00/hr 112.00/hr Project Analyst 4 77.00/hr 94.00/hr Financial Analyst 2/3 54.00/hr 78.00/hr Associate Engineer 7 $118.00/hr $144.00/hr Engineering Manager 6 105.00/hr 129.00/hr Sr. Engineer 5 92.00/hr 112.00/hr Project Engineer 4 77.00/hr 94.00/hr Engineer 2/3 54.00/hr 78.00/hr Associate Planner 7 $118.00/hr $144.00/hr Planning Manager 6 105.00/hr 129.00/hr Sr. Planner 5 92.00/hr 112.00/hr Project Planner 4 77.00/hr 94.00/h Planner 2/3 54.00/hr 78.00/hr Sr. Designer 3 $64.00/hr $78.00/hr Project Designer 2 54.00/hr 66.00/ht Designer 1 41.00/hr 50.00/hr Construction Observer 50.00/hr $80.00/hr CAD Manager 77.00/hr $94.00/hr Sr. CAD Operator 64.00/hr 78.00/hr CAD Operator 54.00/hr 66.00/hr Sr. Word Processor 38.00/hr $51.00/hr Word Processor 30.00/hr 49.00/hr 5.4 Estimated Hourly Labor Effort and Fees By Individual Given a scope of service and hourly billing rates, EES estimated the total number of labor hours and fees to complete this project. Exhibit 2-2 is a detailed exhibit of the hours and fees by individual and by task. Revised Scope of Services 1s City of Kalispell Tom Angle Randy John Shawn Charms Grand SJ!$h Task Description Gould Sanchez Sgg Maxwell Koom Hobbs Clerical Total Hourly Billing Rate $150.00 $120.00 $150.00 $150.00 $73.00 $68.00 $45.00 1 father Prefect Meeting Hours- 6 4 0 0 0 0 1 11 Fees $900.00 $480.00 $0.00 $0.00 $0.00 $0.00 $45.00 $1,425.00 2 Dale Collection Hours- 0 0 0 0 10 0 0 10 Fees $0.00 $0.00 $0.00 $0.00 $73D.00 $0.013 $0.00 $730.00 3 Revbw Performance hdicafors Hours- 16 0 0 0 0 48 8 72 Fees $2.400.00 $0.00 $0.00 $0.00 $0.00 $3.264.00 $360.00 $6,024.00 4 ReNew Financial Policies Hours- 24 0 0 0 32 0 4 60 Fees $3,600.00 $0.00 $0.00 $0.00 $2,336.00 $0.00 $180.00 $6.116.00 5 Determine Revenue Requimments Hours- 16 20 0 0 60 0 0 96 Fees $2,400.00 $2,400.00 $0.00 $0.00 $4.380.00 $0.00 $0.00 $9,180.00 6 Coat of Service Hours- 16 24 0 2 80 0 0 122 Fees $2,400.00 $2,880.00 $0.00 $300.00 $5,840.00 $0.00 $0.00 $11,420.00 7 Rate Design Analysis Hours- 12 12 0 1 32 0 0 57 Fees $1,800.00 $1,440.00 $0.00 $150.00 $2,336.00 $0.00 $0.00 $5,726.00 e System DftWopmeaf Charges Hours- 8 0 55 0 0 80 6 149 Fees $1,200.00 $0.00 $8.2W.00 $0.00 $0.00 $5,440.00 $270.00 $15.160.00 9 WnWen Reports(DmR and Final) Hours- 24 8 0 0 4 0 8 44 Fees $3,600.00 $960.00 $0.00 $0.00 $292.00 $0.01) $360.00 $5,212.00 10 Presentaf ions (8 Meetings) Hours- 48 0 0 0 0 0 12 60 Fees $7.200.00 $0.00 $0.00 $0.00 $0.00 $0.00 $540.00 $7,740.00 it ComputerizadomMadels Hours - (No Charge - Included Above) 0 0 0 0 0 0 0 0 Fees $0.00 Won $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Total Hours 130 68 55 3 186 80 27 549 Total Fees $25,500.00 $8,160.00 $8,250.00 $450.00 $15,914.00 $8,704.00 $1.756.00 $68,733.00 Plus: Expenses Airfare (12 R.T. @ $45D/R3.) $5,400,01) Hotel (12 Nights @ $80.O0/nigh0 960.00 Car Rental (12 days @ $75/day) 900.00 Meets 600.00 Misc.- Telaphone/Fax/Copies 1,00I)DO Total Expenses $8,860.00 GRAND TOTAL FEES $77,593.00 2.5 Summary This section of the proposal provided a detailed discussion and fees associated with this project. Revised Scope of Services 17 City of Kalispell