5. Water & Sewer Rate StudyCity of Kalispell Public Works Department
Post Office Box 1997, Kalispell, Montana 59903-1997 - Telephone (406)758-7720, Fax (406)758-7831
MEMORANDUM
March 21, 2002
To: Mayor, City Council and City Manager
From: James C. Hansz, PE, Director of Public Works/City
Subject: Water/Sewer/Storm Drainage Cost -of -Service Rat
As recommended in the City's Facility Plan 2000 and recently briefed to City Council,
the Public Works Department is about to advertise for qualifications and proposals for
performing a cost -of -service rate study of our utility operations. In preparation for this, I recently
attended a seminar on the basics of cost -of -service rate setting that also included a session on the
fundamentals of system development charges.
This was a very informative seminar that opened my eyes to exactly what this effort
would entail, and also what some of its results would mean for the City. I came away with a solid
appreciation of the processes involved in cost -of -service rate setting and also a regrettably clear
understanding of the state of "disrepair" that exists in our present rate structure. Without delving
into all the small details of rate setting, there are four main principles, or objectives, of the rate
analysis effort we are preparing to undertake.
• Rates should be cost -based and equitable, set at such a level that they meet the full
revenue requirements of the utility.
• Rates should be easy to understand and administer.
• Rates and the process of allocating costs should follow the principles of cost -
causation: what causes the cost and does the rate address the revenue required to
cover those costs?
• Rates should be stable in both their ability to provide revenues and in the customer's
perception of the rates from year to year.
Following these basic principles to achieve the desirable objective of fair, stable and
understandable rates that meet the utility's revenue requirements will result in substantial
changes from current and past practice. Two of these changes can be predicted right now.
CHANGE ONE
In order to bring our rate system into line with standard industry practice, it will be
recommended that the City begin to fund all its system replacements from rates. Those who are
wearing out the system, the current users, should fund system replacements. System needs
related to growth should be funded from system development charges. Right now this is not the
case. Much of our replacement need is funded from connection charges paid by new customers.
This is not standard practice, and in the majority of states there are laws that prevent using
connection fees this way. Rates will be recommended to rise sharply to fund replacements.
CHANGE TWO
The City's connection charges will be recommended for overhaul, and it is probable that
100% of these funds be recommended to be reserved and designated as system development
funds to be used solely to replace/upgrade/provide facilities necessary to serve new growth. New
customers pay these charges into the system. These payments are typically intended to reimburse
for system capacity as it is consumed and to build future capacity needed to accommodate
growth. These funds are typically not used to pay developer related system costs. City
connection (system development) fees are far less than needed to deal with the demands of
growth on the system. It is expected that these fees will be recommended for substantial
increases.
Before Public Works sets off on a cost -of -service rate study it is important for the City
Council to understand that these significant changes will, with absolute certainty, be prominent
among the many things to be recommended.