Water Rate Increase Background InformationIn August of 2013, the City of Turlock contracted with Municipal Financial Services to conduct a Water Rate and Water Capacity Charges Study to analyze the adequacy of revenue to meet projected expenditures in the Water Enterprise Fund. The intention of the Study was to determine whether revenue generated from water rates will be adequate to cover recurring operating and maintenance costs, current and future capital costs, and debt service obligations. The Study projects approximately $31.7 million for capital expenditures over the next five years. Those expenditures included an estimated $9.2 million for groundwater supply projects, $10 million for water storage, and $12.5 million for distribution system improvements.
Existing Rate StructureIn 2011, Turlock began to bill customers based upon actual water use as measured by their water meter. The structure for Turlock’s metered water rates were developed more than 20 years ago. The rates were based on the usage patterns of industrial and commercial customers. The City’s rates do not account for the water use patterns of residential customers.
Furthermore, the rate structure provides customers with a minimum “allotment” of water – approximately 20,600 gallons - for the minimum charge. Such a structure can encourage overuse at times and does not allow customers to fully benefit from water conservation measures.
While the City has made reductions in operations and capital expenses, a structural deficit remains in the City’s water fund. Furthermore, the City faces a number of significant capital needs to provide an adequate water supply that meets state and federal water quality standards.
Proposed Rate StructureThe new rate structure has three primary charges: a series of service charges which vary by meter size and recover approximately 60% of revenues; an account charge which is the same for each account and recovers approximately 6% of revenues; and a group of commodity charges (one for each of the three groups of customer classes) which recovers approximately 34% of revenues.
The commodity charge is different for each of the three groups of customer classes: Residential (Single Family and Multiple Family accounts); Nonresidential (Commercial, Industrial and Institutional accounts); and Landscape Irrigation accounts.
The proposed rate increases are scheduled for July 1, 2014, January 1, 2015 and then annually thereafter on January 1, with the last increase proposed for January 1, 2019.
Debt CoverageIn 2008, bonds were sold to fund significant capital improvements to the water system, including new wells, water storage tanks, and water meters. Due to declining revenue, in 2011-12, the City relied on $560,000 from the rate stabilization reserve to meet its minimum debt coverage requirements. Such deficit spending is not sustainable in the long-term and may adversely impact the credit rating of City’s Water Enterprise Fund.
Capital ImprovementsThe City has 24 active groundwater wells, of which 14 are at or above 75% of the maximum contaminant level for certain contaminants regulated by the California Department of Public Health, such as arsenic and nitrates. Historically, groundwater quality decreases over time. Furthermore, water quality regulations continue to become more stringent. As a result, if the City remains on groundwater as the only source for its drinking supply, wellhead treatment will become necessary.
While wellhead treatment addresses contaminant issues, it does not reduce the City’s dependency on groundwater, the long-term reliability of which is uncertain. Increasing the City’s water supply portfolio to include surface water would help insulate the City from variations in groundwater quality issues and groundwater extraction within our region. To meet the future water demands, the cities of Turlock, Modesto, and Ceres have been evaluating a Regional Surface Water Supply Project (RSWSP) that will produce potable water from the Tuolumne River. The RSWSP could initially provide up to 15 million gallons per day (mgd) of surface water to the City of Turlock. The RSWSP facilities would include a surface water treatment plant and water transmission mains.
The potential surface water project represents a long-term, secure supply of high quality drinking water that would provide over half of the City’s future water needs. However, the costs of the RSWSP are not included in these proposed rates.