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Department Approval �� ,�: �� Item Description: l�'�, Jy REQUEST FOR COUNCIL ACTION Discussion on the 2009 Utility Rates Date: Item No.: Date: 3/30/09 Item: 13.e Date: 3/23/09 Item: 13.a 03/09/09 13.a City Manager Approval � / BACKGROUND On November 17, 2008, the City Council adopted the 2009 Utility Rates. With this action, the Council adopted a new rate structure that was designed to achieve two newly-established outcomes. They included: ❖ Providing long-term financial sustainability for the City's water, sewer, and stormwater operations ❖ Encouraging water conservation in conjunction with the goals and strategies outlined in the City's Imagine Roseville 2025 initiative, as well as a new State Law. Since adopting the new rates, the City has expectedly received a number of inquiries on the impact of the new rates, and whether the conservation measures will achieve the desired outcome. Copies of these inquries are attached. The remainder of this report addresses these inquiries. Desired Outcome #1 — Ensuring Financial SustainabilitX The 2010-2019 Financial Plan identifies a funding gap of over $18 million over the next 10 years for the planned replacement of City water and sewer infrastructure. Simply put, the `base fee' portion of the City's rate structure has proven to be inadequate in funding this need. It is an accepted practice to structure the base fee in such a manner that can account for fixed costs such as capital replacements. It is also widely accepted that similar customers, such as single-family households, be charged the same base fee because the cost of providing infrastructure to the home is relatively the same. Historically however, and for reasons that aren't entirely known, the City's base fee was set at a level that was insufficient in generating enough revenue to maintain and replace the infrastructure. The difference had to be made up with the revenue derived from `usage fees' . However, this practice creates inequities in how the City's infrastructure is funded. Secause infrastructure funding is now tied to usage, those that consume a lot of water are paying a greater share for the infrastructure than those that consume relatively little. In other words, an implicit (hidden) subsidy was in place. In effect, 4-person households were subsidizing the costs for 2-person households. Under this scenario, if higher volume households began reducing water consumption, funding for infrastructure replacement would be diminished and the financing gap noted above would increase. Page 1 of 4