1. Summary

During the update of the water and sewer comprehensive plans this past year, an inventory of both the water and sewer systems was developed along with the historical cost of each system. The historical cost was divided by the capacity of each system to determine the facilities cost per ERU. Alternatives were also developed to provide a range of charges for the City Council’s consideration. The water range is between $5,254 and $7,847 per ERU. The sewer range is between $6,860 and $10,010 per ERU. The City of Sultan currently charges $4,400 per Equivalent Residential Unit (ERU) in facilities charges for new connections to the City’s water system and $4,496 per ERU for the City’s sewer system.

FACILITIES CHARGE ALTERNATIVES - PER ERU	WATER	SEWER
A. Historical cost divided by system capacity (base)	$5,469	$7,528
B. Include allowable interest for up to 10 years	$7,847	$10,010
C. Adjust for grants received	$5,254	$6,860
D. Adjust for grants received and include allowable interest	$7,498	$9,106
Current Facilities Charge (Ordinance 755-00)	$4,400	$4,496

The conclusion is that the current water and sewer facilities charges can be much higher. These alternatives provide the upper limit of allowable facilities charges. It is the City Council’s choice where to set each charge. This report describes the alternatives and associated trade-offs to assist in the discussion. As Sultan continues moving into the future and the capital improvement needs have been identified, the rate study will be completed using the Council’s preferred alternative from this discussion.

2. Purpose of Facilities Charges

When a new home or business comes to the city for sewer service, they are benefiting from the sewer system and treatment plant that are already in place. The city, thru the existing ratepayers, has paid for the system and expanded it when necessary. There may be debt payments on money that was borrowed to construct the system, as is the case in Sultan for both water and sewer. The facilities charge is a way for new connections to pay their fair share of the cost of the system. Some describe it as "no free service".

The facilities charges collected are set aside for capital improvements or to go toward debt payments on existing facilities. Sultan’s current practice is to use the facilities charge revenue for both debt payments and capital improvements. The existing ratepayers pay the remainder in their bi-monthly rates. On one hand, the higher the connection charge, the less impact there will be on rates. On the other hand, the city may wish to keep the connection charge lower to encourage more development and new customers to help pay for debt and operations. The decision out of the facilities charge discussion will be fed into the rate studies for future financial projections.

3. Inventory of Water and Sewer Facilities

An inventory of the existing facilities was developed during the course of updating the water and sewer comprehensive plans. The Berryman & Henigar report is attached that documents the methodology and includes detailed spreadsheets. The major categories are totaled in the analysis and are summarized below.

INVENTORY OF FACILITIES		With Allowable Interest
	Historical Cost	Up To 10 Years
WATER
Water Mains	9,660,789	14,830,143
Add'l Facilities	3,899,621	5,809,481
Add'l Projects during 2003	2,720,271	2,720,271
Estimated Original Cost	16,280,681	23,359,895
After adjusting for Grants	15,639,681	22,320,104
SEWER
Interceptors	6,405,706	8,387,989
Laterals	2,994,471	4,126,780
Add'l Facilities	3,123,448	4,179,579
Add'l Projects during 2003	122,944	122,944
Estimated Original Cost	12,646,569	16,817,292
After adjusting for Grants	11,525,329	15,298,717

The historic cost method of calculating facilities charges implies that the calculation can be updated each year by including the capital improvement efforts of that year. The line item above, Additional Projects during 2003 reflects the capital improvements during that year.

4. Existing System Capacity

The system capacity of both water and sewer is reviewed during the update of the comprehensive plans. This calculation is defined by the State Department of Ecology for the sewer system and the State Department of Health for the water system. Berryman & Henigar includes the system capacity determination in the attached report.

The water system capacity is based on available storage, and is 2,977 ERU. The sewer system capacity is based on hydraulic capability of the sewer treatment plant, and is 1,680 ERU.

The capacity ERU’s used in the facilities charge calculation should be reviewed when the charge is updated to determine whether system capacity has been adjusted by the capital improvements. This should also be carefully reviewed when the comprehensive plans are updated to determine whether the regulators have changed the limiting factor.

5. Facilities Charge Alternatives

The City’s current charges were calculated during the period when major improvements were either upcoming or recently completed to both the water and sewer plants. The major improvements required long-term borrowing to be able to finance the projects. The charges were focused on the major improvements and did not include a complete inventory of facilities. Now during this update of the comprehensive plans, the major improvements are included in the inventory of water and sewer facilities along with the historic cost.

FACILITIES CHARGE	ALT. A	ALT. B	ALT. C	ALT. D
ALTERNATIVES	Historical Cost	With Interest	Grants	After Grants
	(Base)	Up To 10 Years	Removed	With Interest
WATER INVENTORY
Water Mains	$ 9,660,789	$ 14,830,143
Add'l Facilities	3,899,621	5,809,481
Add'l Projects during 2003	2,720,271	2,720,271
Est. Original Cost	16,280,681	23,359,895	15,639,681	22,320,104
Capacity in ERU's	2,977	2,977	2,977	2,977
Historic Cost per ERU	$ 5,469	$ 7,847	$ 5,254	$ 7,498
Current Charge	$ 4,400
SEWER INVENTORY
Interceptors	$ 6,405,706	$ 8,387,989
Laterals	2,994,471	4,126,780
Add'l Facilities	3,123,448	4,179,579
Add'l Projects during 2003	122,944	122,944
Est. Original Cost	12,646,569	16,817,292	11,525,329	15,298,717
Capacity in ERU's	1,680	1,680	1,680	1,680
Historic Cost per ERU	$ 7,528	$ 10,010	$ 6,860	$ 9,106
Current Charge	$ 4,496

The above table summarizes the alternative calculations for ease of discussion. Alternative A is the base historic cost calculation and the other three include adjustments to the base. The only difference between the alternatives is the definition of historic cost (include interest or adjust for grants received).

ALT. A – Historical Cost (Base): This alternative includes the historical cost of all facilities included in the inventory. This refers to the cost of the facilities at the time of purchase or construction. If the actual cost was not known, the historic cost was estimated using an engineering index to convert to previous years, the Engineering News Record (ENR). The detailed listing of facilities, along with the year, the ENR index conversion and the historic cost are all included in the Berryman & Henigar report attached. The Historical Cost per ERU for water is $5,469 compared to the current charge of $4,400. The Historical Cost per ERU for sewer is $7,528 compared to the current charge of $4,496.

ALT. B – With Allowable Interest Up to 10 Years: This alternative includes allowable interest in addition to the Base and results in the highest alternative. The statute providing authority to make charges for connecting to water or sewerage systems, RCW 35.92.025, allows interest charges to be included in the equitable share, up to a maximum of 10 years, a maximum of ten percent per year, as long as the aggregate amount of interest does not exceed the equitable share allocated. The detailed inventory also calculated the allowable interest for each line item. This method provides the high end of the range. Water cost per ERU increases to $7,847 and sewer cost increases to $10,010 per ERU.

ALT. C – After Adjusting For Grants: In attempting to provide reasonable alternatives for consideration, an adjustment can be made to reduce the historic cost by the grants received. City staff reviewed old files to identify the projects receiving grants and the amount. The total was reduced from the Base. This alternative provides the lowest end of the range of alternatives presented. After adjusting for grants, the water cost per ERU is $5,254 and the sewer cost is $6,860 per ERU.

ALT. D – After Adjusting for Grants and Including Allowable Interest: This alternative combines all others. The Base is reduced for grants received and the interest is included as allowed. The water cost per ERU after grants and with interest is $7,498 and the sewer cost is $9,106 per ERU.

6. Other Jurisdictions

Each jurisdiction develops and adopts its own charge for facilities. There are a variety of names for such charges, including connection, tap-in, system development, capital facilities, general facilities, etc. While it is informative to know what neighboring jurisdictions are charging, it is important to understand that each system is different and the charge is developed to support your own sewer and water system. Some jurisdictions may weight more heavily toward charges for new connections to keep the monthly rates lower, others may want to encourage new customers and keep the charges for new connections lower.

A comparison chart follows to show the current water and sewer facilities charges in neighboring jurisdictions. These do not include the physical cost of connection, water meter or inspection.

Berryman & Henigar Inc.

01 June 2004

Properties connecting to the water and to the sewer systems are charged a proportionate share of the value existing in each utility. This value is defined from the historic cost invested in each utility for capital facilities, divided by the capacity of the system. Capacity is defined in terms of equivalent residential units, or ERU, which are the average water or sewer capacity required for an average single family home in Sultan.

The Inventory of the Sultan water system shows the estimated project costs for water mains total $9,660,789 as invested since 1960. These historic costs were tabulated by individual project for the actual year of construction as listed on the attached spreadsheets.

We then consider interest costs to the utility by assigning an applicable interest rate for the year of construction as taken from the Index of General Obligation Bond Interest Rates, and computed up to ten years of simple interest charged against the principal. The total applicable interest is $5,169,354. The total historic cost with interest attributable to the water piping system is therefore $14,830,143.

At this level of detail we did not compute interest based on a declining balance nor did we construct an equal payment series, nor did we consider the affect of periodic refinancing to consolidate the debt at more favorable, reduced interest rates. However, utility improvements are usually financed through revenue bonds, not GO bonds. Revenue bond interest is generally 0.2 to 0.5 percent higher than the GO bond rate for the same date, maturity, and municipality. We believe that by using the GO bond rate in the historic tabulation the dollar total developed for interest is reasonable.

The water system capacity is defined through evaluation of several factors. With the Water Supply Main from the Everett Pipeline No. 5 coming online during 2003, the limiting factor in the Sultan water system capacity is the available storage in the two reservoirs. Storage criteria are defined by the State Department of Health in several categories. The limiting category for Sultan is Standby Storage. The two City reservoirs can hold 2,480,000 gallons, of which 2,084,000 gallons is available as Standby Storage according to the draft Water System Plan we completed in August 2003.

Each Equivalent Residential Unit was determined through the draft Plan to have an Average Day Demand of about 350 GPD. The State Health criteria require two days of Standby Storage for each ERU, so the available storage has capacity for 2,977 ERU.

The water system historic costs should include other water facilities too, besides just the piping system. The Sultan watershed and other property, the dam creating Lake 16, the water treatment plant, the two reservoirs, and the pump station have an additional historic cost of $3,889,621. This amount becomes $5,809,481 when interest is included. An additional $2,720,271 in new facilities was completed during 2003, including the connection from the Everett Pipeline No. 5. The total historic cost at the end of 2004 was $16,280,681, or $23,359,894 with interest.

The water system capacity remains limited by the available storage even with the connection to Everett, so the capacity remains 2,977 ERU. The historic cost is therefore $5,465 per ERU without interest, or $7,854 per ERU with interest included. The $4,400 value defined in City Ordinance 755-00 is not adequate to capture all historic costs within the existing system.

A new capacity computation was prepared in 2004 for the Sultan sewer system using the flow monitoring data developed during the fall of 2003. The capacity limitation for the sewer system was found to be the hydraulic capability of the treatment facility, which is approved by the State Department of Ecology for an Average Day flow of 720,000 GPD during the Maximum Month. The existing sewer system was determined by the 2003 flow monitoring program to generate about 0.400 MGD during the Maximum Month, which was November. This flow equals about 166 GPD per person.

The historic capital costs estimated for sewer main and laterals add up to $9,400,177. Applicable interest for a maximum of ten years totals $3,114,592. The total historic cost is therefore $12,514,769 for the sewer piping system only. The value of the wastewater treatment facility, the pump station, and the outfall is $3,123,448 plus $1,056,131 in interest, with additional improvements added during 2003 for $122,944. The total historical cost for the sewer system is $12,646,569, or $16,817,292 with interest.

New extensions to the system are estimated to generate less infiltration and inflow, though the proportion of commercial or industrial flow may be higher, so future capacity needs were conservatively estimated at 163 GPD per person. Accordingly, the total capacity for the sewer system is estimated as about 4,370 people connected to the sewer system, which is about 1,680 ERU.

Therefore, the historic value for the Connection Charge to the sewer system is about $12,646,569 without interest divided by 1,680 ERU equals about $7,528 per ERU. This is noticeably more than the $4,496 per unit stated in the City Ordinance. With interest, the historic value is $10,010 per ERU.