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Carefree Truth
Issue #893, February 15, 2021
Issue #893, February 15, 2021
Greg Crossman said the bottom line question everyone has is, "How will this impact my water rates?" To address this, he introduced Dan Jackson of Willdan Financial Services, who has 36 years of experience and has performed over 400 rate studies throughout the U.S.
Mr. Jackson said the most common questions that arise concern the affect on both the acquired and the existing accounts. Will it be tolerable, excessive, within range? 10 year forecasts are based on a series of reasonable assumptions. When a water utility acquires new accounts, there are 3 basic interactive impacts from a financial standpoint. 1. There will be significantly more revenue because the Carefree Water Company (CFWC) will be acquiring approximately 550 new accounts. 2. Operating costs will increase. 3. The CFWC will have to issue debt in order to do the capital improvements to interconnect the systems and make sure everything operates properly.
When evaluating this, you must look at usage patterns. The average usage of the existing customers is about 12,300 gallons per month. The usage in the Carefree Service Area (CSA) neighborhoods being acquired is heavier, about 15,275 gallons per month. The more water that is sold, the more revenue that is generated to offset the additional costs. The additional accounts will provide about a 20% increase in the customer base, which will bring in a lot of additional revenue and will also increase operating costs.
Assuming the acquisition closes at the beginning of the 2022 Fiscal Year which starts on July 1st, the chart below is the cost forecast for the next 10 years. The existing debt will be retired by 2028. Costs will rise in 2021-2024 but will stabilize after that because some of the operating costs will go away.
The next chart shows the income forecast. The blue line represents the existing customers. The purple line represents the acquired customers. By 2027, the revenue from the acquired customers will exceed the cost of the service. The combination of well structured debt and revenue from the existing accounts will minimize the impact on both the current and acquired rate payers.
The next important question is, "What would happen if the acquisition were abandoned and the status quo continued?" If that were to happen, there would still need to be rate adjustments. Operational costs, like everything else, continue to rise by at least 3% a year, plus there would still be capital improvement needs. Water systems are expensive to build and expensive to maintain. Like any asset, they wear out over time and must be replaced to assure a high quality of service.
Over the next decade, 3-5% annual rate increases will be needed. To its credit, the CFWC has implemented 4.4% rate increases over the past couple of years, which has resulted in the water company being very sound financially, and has reduced the burden of rate increases that will be needed in the coming years. To complete the acquisition and improve the system, the following annual rate adjustments in 2022-2026 of 4.4%, and in 2027-2030 of at most 2.0%, will be needed. The rate adjustment of 4.4% for all customers of the water company will remain the same as it has been for 5 more years, even with the acquisition. The need for additional rate increases is limited due to the structure of the debt issued, the current debt obligation that will be retired by 2027 providing more cash flow, and the additional revenue from the acquired accounts. The average water utility in the US is forecast to implement a 5-6% annual adjustment for the next decade.
Over the next decade, 3-5% annual rate increases will be needed. To its credit, the CFWC has implemented 4.4% rate increases over the past couple of years, which has resulted in the water company being very sound financially, and has reduced the burden of rate increases that will be needed in the coming years. To complete the acquisition and improve the system, the following annual rate adjustments in 2022-2026 of 4.4%, and in 2027-2030 of at most 2.0%, will be needed. The rate adjustment of 4.4% for all customers of the water company will remain the same as it has been for 5 more years, even with the acquisition. The need for additional rate increases is limited due to the structure of the debt issued, the current debt obligation that will be retired by 2027 providing more cash flow, and the additional revenue from the acquired accounts. The average water utility in the US is forecast to implement a 5-6% annual adjustment for the next decade.
The chart below contains the proposed monthly rate plan.
The conservation plan dictates that the more water you use, the higher the rate. This is intended to encourage people to conserve water. With the acquisition, the current CFWC customer who uses 12,000 gallons (the average) will see a rate increase of $3-4 a month.
The acquired area rate proposal is shown in the chart below. This assumes that Cave Creek does not increase its rates before 2023.
The acquired area rate proposal is shown in the chart below. This assumes that Cave Creek does not increase its rates before 2023.
Cave Creek has a different rate structure than Carefree's. There is a different minimum charge and a different volume metric. Cave Creek's conservation plan is much more aggressive. This also recognizes the additional costs that CFWC will incur in ensuring the interconnection and quality of service to the new accounts. The proposal is that $20 would be added to CFWC's minimum charge. Each user would be impacted differently based on whether the customer is in a boosted or non boosted area of the Cave Creek water company. Those customers pay different rates to Cave Creek. The customers in the CSA that are currently paying the boosted rate to Cave Creek will pay about $5 more a month for their base rate, and those in the non boosted area will pay about $15 more for their base rate. The amount of individual water usage will also impact the rate structure. The CSA customers will pay a bit more than the existing customers of the CFWC, but will be assured of clean and dependable water into the future.
This chart shows the impact on the monthly charges of the acquired area.
https://vimeo.com/510863295
Lyn Hitchon
Prepared by Carefree Truth
Copyrighted
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