Council seeks to clarify water rate issue

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Whether City Utilities' water department truly needs a rate increase seems as murky as water waiting for cleansing at the Blackman Treatment Plant, at least to some members of City Council, who will soon have to vote yea or nay on the increase request.|ret||ret||tab|

At the Aug. 21 joint study session between CU and council, CU's Chief Financial Of-ficer Elaine McDonald fielded questions from the entire council except for Gary Gibson, who was hospitalized. All of CU's board members were present but Dan Manna. |ret||ret||tab|

Council has before it two alternate ordinances to raise water rates, but Councilwoman Teri Hacker suggested that the first question which needed to be answered by CU officials was whether the increase was needed at all because CU has $223 million in reserve funds. |ret||ret||tab|

It's true that the water utility hasn't increased rates in nine years, as officials say. It's also true that the Consumer Price Index has jumped 24 percent during those nine years, according to statistics from CU.|ret||ret||tab|

And in addition to costs for water treatment going up, the expense to pump raw water to be treated have risen since the Stockton Lake-to-Fellows Lake pipeline was installed. |ret||ret||tab|

So that's why CU officials have asked for $1.5 million more revenue for next year by means of a rate increase.|ret||ret||tab|

But Councilwoman Hacker wondered aloud at the study session why the substantial reserves couldn't be tapped for capital needs instead of the customers' pockets. |ret||ret||tab|

Of the $223 million, $83.5 million is required to be kept in reserve for bond covenant purposes for both utilities, McDonald said. |ret||ret||tab|

At a later, exclusive interview with SBJ, McDonald said the large reserve is needed to ensure to lenders that payments will be made should the utilities suffer revenue shortfalls. |ret||ret||tab|

The amount must be equal to a year's worth of interest and principal payments on each outstanding bond issue, she said, so those funds can't be touched.|ret||ret||tab|

Here is how the $83.5 million bond requirement reserve is broken down, she said: The public utility has $44.2 million in its general account and working capital account. According to the "rates and fees requirements" for bond funding, McDonald said, the amount in the general account must be equal to what is needed for the public utility to pay all its bills for operation and maintenance, plus 10 percent of the debt service requirement. |ret||ret||tab|

Another $28 million is earmarked for the public utility and $11.3 million is the water utility's share of the reserve funds which are required to be in reserve- and sinking-fund ac-counts. Once again, these funds satisfy bond requirements and represent the monies out of which interest and principal is paid on outstanding bonds for both the public utility and the water department. |ret||ret||tab|

Approximately $6.1 million of the $83.5 million bond covenent reserve is used by the water department to pay for its day-to-day operations and maintenance, McDonald said. Unlike the public utility, the water department isn't required by its bond covenants to keep a general revenue or working capital account, but it just makes good business sense to do so, she said. |ret||ret||tab|

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Balance of reserves|ret||ret||tab|

Total funds set aside for projects in the long-range plan equal $67.6 million, according to the 2002 budget request.|ret||ret||tab|

Of that, $11.1 million is just for the water utility and was collected from customers to help fund projects in the long-range plan, McDonald said. |ret||ret||tab|

Customers also pay for the public utility's long-range projects by advance collections.|ret||ret||tab|

The funds in the joint utilities' project accounts for long-range planning fulfillment aren't enough, McDonald said, but are a starting point. Projects can be funded additionally by the issuance of general revenue bonds, which require an election by the people, and by lease-purchase agreements, which don't require a vote.|ret||ret||tab|

Projected to the end of the year ending September 2003, the $11.1 million long-range projects for the water utility are:|ret||ret||tab|

Fellows Lake pump station expansion: $2.1 million|ret||ret||tab|

Blackman Treatment Plant expansion: $2.2 million|ret||ret||tab|

Paint distribution tanks: $619,998|ret||ret||tab|

Water east loop construction: $996,592|ret||ret||tab|

Pipeline between Fellows Lake and Blackman: $4.36 million|ret||ret||tab|

Project and funding shortfall: $1.6 million|ret||ret||tab|

Projected for the public utility for the same time period is the expenditure of about $56.5 million on the long-range plan:|ret||ret||tab|

substation feeder addition: $1.34 million|ret||ret||tab|

radio system replacement: $6.2 million|ret||ret||tab|

utility radio units: $1.4 million|ret||ret||tab|

infrastructure: $3.1 million|ret||ret||tab|

mission critical systems: $21.1 million|ret||ret||tab|

various substations: $5.94 million |ret||ret||tab|

Jordan Valley Park utility relocations: $3.37 million|ret||ret||tab|

competitive positioning/industry restructuring: $9.7 million. |ret||ret||tab|

The numbers don't quite add up to $67.6 million because of timing of the projects, but the number is close.|ret||ret||tab|

Another $27.4 million in jointly held reserves is to cover uninsured losses for both utilities as well as high deductibles for the insurance they do carry. It also serves as self-insurance for potential exposures where the insurance premiums are too high, McDonald said. Such exposures might include damage to water mains or electric distribution lines. "If you have a tornado or an explosion, whatever costs are associated with that, we have to have enough money to be able to do those in an emergency situation," McDonald said.|ret||ret||tab|

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Credit rating|ret||ret||tab|

Another question asked by Council-woman Hacker came out in discussion of the utilities' credit ratings both are AA.|ret||ret||tab|

Since the combined utility also has an excellent credit rating, why can't it borrow what it needs for capital expenditures instead of asking for money from its customers? Hacker said.|ret||ret||tab|

The AA credit rating and its municipal utility designation allows City Utilities to make more money on investments than it has to shell out in interest payments on its bond indebtedness.|ret||ret||tab|

The utility is limited in what it can borrow money for as well as where it can invest money, according to McDonald.|ret||ret||tab|

But as reported to the board during its retreat in March, based on industry standards CU has excess debt capacity, which translates into a very low debt-to-equity ratio. The industry average for debt-to-equity is 60/40. |ret||ret||tab|

The public utility's debt-to-equity ratio is 15/85. It has $590 million in equity, and owes $105 million. So it has the capacity to borrow $780 million, McDonald said, but of course, she added, the utility has to be able to pay that back out of revenues.|ret||ret||tab|

As for the water utility, its debt-to-equity ratio is 21/79. It has $145 million in equity, and debts of $39 million, which gives it the ability to borrow $179 million. [[In-content Ad]]