Written by Don Ratzlaff Wednesday, 02 April 2008 13:03
The above graphic was based on an actual city residential bill from February. The "Electric Surcharge" and "Water Surcharge" have been incorporated into the new rates for those services.
Invoking occasional gallows humor about their future as public servants, Hillsboro City Council members approved at a March 27 special meeting new billing rates for four city utilities: water, sewer, electric and trash collection.
The new rates, which will result in a total bill increase of around $30 to $35 per month for the average residential customer, will take effect with the April billing.
The three council members in attendance—Shelby Dirks, Shane Marler and Robert Watson—voted unanimously on each ordinance. Council Byron McCarty was absent.
City Administrator Larry Paine said the rate adjustments were long overdue to offset cost increases to the city for debt service on facility improvements for water and sewer, higher rates from electric providers, and equipment needs for the sanitation department.
“Revenues did not meet basic expenditure requirements,” Paine said. “I don’t have any choices here. This is something we’ve got to fix.
“That’s one of the reasons the tar-and-feather pots will be warming up,” he added with a smile. “But I’ve been saying since before I was hired that this is what we’ve got to do.”
A case in point was the water utility.
“When I got here, we were—and are —dangerously low on cash (for the utility),” he said. “There was one point in February when we had less than $1,000 cash in that utility.
“If we had had minus cash, it would have been a budget violation and we would have had to issue what they call no-fund warrants in order offset the loss.”
Common per-unit charge
The action of the council culminates several months of rate analysis and long hours of complex calculating by Paine.
For each of the four utilities, Paine developed a two-part rate formula: one to cover base expenses—the cost of doing business, such as debt service, staffing and maintenance—and the other to cover a customer’s consumption.
The bill to the customer will be based on a combination of the two charges. (See example.)
Paine said his goal was to determine a common unit price for each utility, regardless of whether the customer is categorized as residential, commercial or industrial.
“The nice thing about this is that all of the rate customer blocks are the same for electric, water and sewer,” Paine said.
“At some earlier point, the council or administrator figured out that if you make the rates all the same, nobody’s going to complain that somebody is getting a better deal. They're all the same, and it made my job easier.”
The primary issue driving the rate increase for water and sewer is debt service—$301,869 a year for the recent upgrade at the water plant and a projected $99,905 per year for the new sewer lagoon project, now under construction.
“We have new debt service that we haven’t been paying before,” Paine said. “And the debt service we have had to this point has not been included in the schedule.”
Another factor in setting the new sewer rate is the Rural Development Administration’s requirement that a city have an average rate of $35 for its customers to use agency funds to help finance construction costs.
Prior to the rate change, the electric utility has been losing cash balance due to the rising cost of energy, Paine said, and because of the city’s decision years ago to annually transfer $150,000 from the utility’s revenue to subsidize the city’s general fund and capital improvements.
The revenue transfers will no longer continue, Paine said.
“In one sense it’s not a bad idea,” Paine said about the practice. “But we were kind of overstepping that presumption.”
Also approved by the council as part of the electric rate structure is a concept called a “power cost adjustment” that will enable the city to raise or lower the charge based on fluctuations in energy prices.
The beginning PCA is 6.54 cents per kilowatt hour out of the total new rate of 9.996 cents per kilowatt hour. By law, the council is required to review the PCA calculation each year for possible adjustment.
Perhaps the most difficult utility to charge a comparable per-unit rate for all customers was trash collection, Paine said, because the city offers a variety of pickup schedules based on customer needs. It also offers four container sizes for customers, ranging from one cubic yard to three cubic yards per pickup.
“What I tried to do is get all the costs oriented so we know what it costs to have one yard (of trash) picked up one time,” he said.
The impact of that approach is that customers who require fewer pickups per month—including almost all residential users—will actually pay less for trash collection than they had been, and customers that require more pickups per month will see an increase.
Impact on mill levy
Even with this latest decision, Paine said the council will still need to address the financial impact of no longer subsidizing general operations and capital improvements with electric revenues.
The practice has helped the city to avoid a noticeable mill-levy increase for the past dozen years or so.
“We might have a mill-levy rate increase, but the effect will be on how we address the capital improvements of the city,” Paine said.
“That will be the next big nut to crack because we’ve basically covered the water and the sewer funds, as far as getting those two things back up to operation state,” he said. “The third leg on the milk stool is streets.
“Anybody can drive around and see that we need some help there. We’re going to have to address that.
“Folks decided not to pay (for timely street maintenance) years ago. So now, when the streets are in the shape they’re in, they’re going to have to make that same decision: don’t pay and let things fall apart and have 40 miles worth of streets that you have to improve at tremendous costs (eventually).”