2015_0817_CCpacket - Laserfiche WebLink

Home

Attachment D City of Roseville Finance Commission Water & Sewer Utility Rates I. Introduction Based on my readings, discussions with Finance Director Miller and other Finance Commissioners, and observations of City Council meetings, there has been discussion about the appropriateness of water and sewer utility rates, as well as subsidizing residents' bills by funding capital expenditures through the tax levy. Below I discuss my thoughts and suggestions, along with comparisons to my professional work at the Minnesota Department of Commerce (Department) as an electric and natural gas utility regulator. This is in no way intended to be comprehensive, nor a replacement for further discussion or the analysis that has been provided by the City's finance staff previously. II. Rate Design Goals There is not an exact formula for setting rates for utilities, but there are several important, and often times competing, objectives that must be balanced. Below are the Department's basic rate design goals for Minnesota regulated investor-owned electric and natural gas utilities (IOUs):1 1. Rates should be designed to provide the Company a reasonable opportunity to recover all prudently incurred costs, including the cost of capital; 2. Rates should be designed to promote an efficient use of resources; 3. Rate changes should be gradual in order to limit rate shock to consumers; and 4. Rates should be understandable and easy to administer. While there are obvious differences between the operation of electric and natural gas IOUs and a municipal water and sewer utility, I see many parallels between the two. Below I address each rate design goal as it applies to IOUs and then in context of the City of Roseville's (the City) water and sewer utility. 1. Rates should be designed to provide the Company a reasonable opportunity to recover all prudently incurred costs, including the cost of capital. Electric and natural gas IOUs are a natural monopoly allowed by law. In the absence of competition, government regulation has been used to approximate the results that would be achieved in a competitive environment.2 The City's water and sewer utility differs from IOUs, in that the City has alternatives to utility rates for recovery, such as the tax levy or bonding. While many cities subsidize utility rates by funding capital expenditures through their tax 1 Page 2, Peirce Direct Testimony, filed June 5, 2014, in Xcel Electric's most recent rate case in Docket No. E002/G R-13-868. 2 Id. Page 1 of 5