City council hears water and wastewater rate increase options

At an Aug. 11 meeting, the Gunnison City Council heard and discussed a range of options for increasing rates to fund the construction of a new water treatment plant and other water infrastructure improvements.

This conversation was part of the city’s ongoing rate study process, which is intended to help the city determine how to raise rates to repay the loans it will take out to fund the construction of a new water treatment plant and other infrastructure improvements.

The city council previously discussed the rate study with consultant Willdan Financial Services in May, during which the council outlined objectives for the study and the proposed rate increases.

Kevin Burnett, senior project manager at Willdan, outlined the general objectives of the rate study, explaining that it helps ensure that increased operating, maintenance, and capital costs are fairly distributed across all customers.

He said that the city’s water and wastewater utilities are operated as enterprise funds, which means taxes cannot support them and must be funded by rates collected from customers and utility investment fees for capital projects, such as the new water treatment plant.

The rate study would help assess the utility's operating revenues and expenses, incorporate existing and potential capital needs, ensure the utility meets financial and industry standards, and help develop rates that generate sufficient revenue to serve the utility’s customers, Burnett said.

He said that, after reviewing the rate presentation, he would want feedback from the council on which financing plan it preferred to support the water treatment plant, which rate structure it preferred, and whether the city should start setting aside funds for future wastewater treatment plant upgrades.

He also noted that a revenue increase, which is growth in the total amount of money needed to fund a utility’s operation, is different from a rate increase, which is an increase in the rates a utility charges its customers.

Burnett explained that operating costs for the water and wastewater systems are projected to increase by four percent a year over the 10 years covered by the rate study, while the system is expected to grow by one percent each year, meaning that the system is experiencing a shortfall in revenues even without large capital projects like the water treatment plant.

In response to these conditions, he said that Willdan was recommending increases in user rates, changes to the utility investment fees, and future debt for the water utility to support the capital projects.

He then outlined two scenarios for these future debts: the city taking on “traditional debt” through private loans to support the plant, or taking out loans through the U.S. Environmental Protection Agency's Water Infrastructure Finance and Innovation Act (WIFIA).

Burnett said that repayment of traditional debt would begin immediately upon taking out the estimated $60 million in loans in 2027 to build the water plant, requiring steeper initial water revenue increases. To support this, the water utility would have to increase revenue by 75 percent in 2027 and 60 percent in both 2028 and 2029, with a 3 percent increase per year for each of the remaining years in the study, he said.

Repayment of debt through the WIFIA program would be delayed by up to five years after construction of the new plant is completed, Burnett said, thereby requiring less steep revenue increases. Supporting this debt would require a 45 percent revenue increase in 2027, a 35 percent revenue increase in 2028 and a 30 percent revenue increase in 2029, he said, with a 3 percent increase each year afterward through the rest of the study period.

Burnett presented three rate structure options for increasing water rates, including updating the current rate structure to accommodate increased costs. This second option would combine less expensive “lifeline” rates for residential customers at low levels of water use with steeper rates for high water use, and a third option would have higher seasonal rates in the summer and lower rates for the rest of the year. He said that all of these options would generate the funds needed for the utility.

Base charges would be the same for each rate structure option, he said, which would only impact water use rates.

If the city financed the water plant project with traditional debt, Burnett said that base water rates would need to rise from their current level of $33.77 a month for a 5/8-inch meter, a common residential connection size, to $90.60 a month in 2029.

Burnett then went through the costs of each rate structure under each type of debt. He said that the lifeline rate option and the seasonal rate option would both change the current tiers of water use for billing customers, lowering the first tier from 0 to 5,000 gallons for residential users to 0 to 3,000 gallons, and lowering the second tier from 5,001 to 10,000 gallons to 3,001 to 8,000 gallons. Any water use per month above the amount in the second tier is subject to the third tier.

Rates would increase overall across all options, according to Burnett, but the increases would be steeper for higher water use under the lifeline and seasonal rate options.

Commercial tiers and rates were also adjusted, he said, with changes to commercial water use tiers designed to match the proportion of residential users in each tier, ensuring equitable rates.

If the city pursued WIFIA debt, overall rate increases would be lower, Burnett said, since the debt payments would not need to begin as quickly. Under this scenario, the monthly base charge for a 5/8-inch meter would rise from the current rate of $33.77 to $68.62 in 2029.

Burnett then presented scenarios illustrating how these changes would affect several potential customer types in 2027. An average residential user with a 5/8-inch meter who uses 4,000 gallons of water a month would see their bills increase from $51.05 to $76.07 per month if the current rate structure is retained and the city pursues traditional debt, he said, while it would rise to $63.73 under the lifeline rates option and to $64.64 under the seasonal rates option.

An average commercial user with a one-inch meter who uses 13,000 gallons of water a month would see their rates rise from $105.65 to $204.51 per month under the current rate structure, $197.83 with lifeline rates, and $171.38 with the seasonal rate structure.

If the city uses WIFIA debt, the same residential customer as in the previous scenario would see their rates rise to $66.83 per month with the current rate structure, $59.18 with lifeline rates, and $59.76 with seasonal rates. The same commercial user would see increases to $179.53 per month under the current rates, $174.82 per month under the lifeline rates, and $155.31 per month under the seasonal rates.

Burnett said that the rate analysis factored in the potential that increases in rates for high water users would cause them to use less water, and that the seasonal rates shown reflected the higher summer rate, not the lower rates for the rest of the year.

Mayor Diego Plata said the changes under any financing approach would be “much larger” for commercial users than for residential users.

City Manager Amanda Wilson explained that obtaining a loan through WIFIA would require the city to apply and go through a competitive process.

She said that showing the impact of the standard debt would be valuable in the WIFIA loan application process and would also show to the public what the rates would be if the city cannot obtain a WIFIA loan. However, she said that the city “gives everything we can” to the WIFIA application process.

Ben Cowan, finance director for the City of Gunnison, said there are options between WIFIA loans and private loans that would likely come into play.

“I’m less enthused by option one,” said councilor Loren Ahonen. “I don’t like our current rate structure. I don’t think it’s the most effective of the things, and I would skew us towards two and three, and I’m really trying to weigh out in my head the net benefit of the seasonality consideration.”

He said that the seasonal rates would incentivize use of the city ditches for irrigation.

“If we’re going to encourage people to have beautiful yards, we don’t also want to penalize them,” said Councilor Audrey Zahradka.

“Are we encouraging people to have beautiful yards?” asked Ahonen.

“If we talk about utilizing the ditch, but then people who don’t have the ditch, if they still want to have lawns or have gardens or whatever, I don’t know if it’s us necessarily encouraging or discouraging but it does feel like a double penalty with option three,” Zahradka said.

Ahonen replied that, although this structure might have an offset from a system perspective with the system adding users through second home occupants or other seasonal uses during the summer, it would not change the situation for the single user.

“Frankly, I’m not sure I care,” he said about the impact for an individual user. “That’s a choice. It’s often an aesthetic choice. People can make those aesthetic choices, but I would skew two or three and probably two because it’s simpler.”

Councilor Matt Schwartz said he would also lean towards option two because the lifeline rate structure is simpler to understand.

After a further discussion of various facets of the rate structures presented, Ahonen said that the council appeared to be coalescing towards pursuing a WIFIA loan and moving towards either the lifeline rate structure or seasonal rates.

In response to a question from Cowan, Burnett explained that if water conservation were the only priority, option two could be implemented with higher rates for high water users. He added that another priority with option three was addressing second-home users who are only present in the summer.

Schwartz said that this approach could be a “great middle ground” between options two and three.

Zahradka added that there is already a degree of seasonality in the rate structure, since high-volume users tend to use high volumes of water only in the summer.

Burnett then opened discussion of the wastewater portion of the rate study, explaining that there is currently only one financial plan for wastewater. However, the council would need to consider whether it wants to begin setting aside money for future regulatory-required plant upgrades.

Without these upgrades, the wastewater system would require revenue increases of 45 percent in 2027, 25 percent in 2028 and 2029, and 3 percent each year afterward, Burnett said.

In an interview, Wilson said that these upgrades would help pay for infrastructure projects like replacing the containment pad that prevents materials from the city’s Gunnison Gold Composting facility from leaching into the ground and making infrastructure improvements to reduce inflow and infiltration of water into the sewer system, particularly during the spring.

Zahradka asked whether the large rate increases were due to the city council not having recently increased wastewater rates, which Burnett confirmed, adding that the longer a system goes without a rate increase, the larger the increase tends to be when it occurs.

Burnett then presented two rate structures to the council, including one that would align with the current rate structure and update those rates to match increased costs and one that would create a separate rate for county customers.

In an interview, Wilson explained that Gunnison County currently collects wastewater from customers who live near Gunnison but outside the city limits and maintains a collection system that channels this wastewater to the city's wastewater treatment plant for treatment.

She said the city and county currently have an agreement that sets the amount the city bills the county for processing this wastewater. However, the county sets rates and manages billing individual customers using this system.

Burnett explained that residential wastewater customers pay a flat monthly rate, while commercial customers pay a base rate plus a rate that depends on wastewater flows.

If rates were updated to align with the current rate structure, he said that residential customers’ rates would rise from $57.65 a month to $126.47 in 2029. Commercial customers would see their base rates rise from $27.67 per month currently to $65.16 per month in 2029, with flow rates going from $5.81 per thousand gallons currently to $13.69 per thousand gallons in 2029.

He said that, if the city decided to implement different rates for county customers, they would be charged at the same base rates as commercial customers, although with somewhat different flow rates.

Wilson added that the agreement between the city and county would need to be updated once the city decides on how it wants to change rates for the county.

In response to questions from the council, Cowan and Wilson said that the city currently charges the county a lump sum based on the amount of wastewater contributed to the system, and that this change would provide a basis for discussions with the county, although Gunnison County would make the final decision on how to charge its customers.

Wilson added that if the city did not attempt to update the county's rates, they would remain under the current intergovernmental agreement, which was finalized in 2001.

Council expressed general support for pursuing a separate county rate.

Zahradka asked how the city might mitigate the sewer rate increases, since the rise in rates could have a significant impact on low-income and fixed-income customers.

Wilson replied that some of the capital projects could be adjusted to reduce the rate impacts and that these rates did not incorporate any grants, which might reduce the costs of these projects.

She added that staff would prefer to present the highest potential costs and then be able to reduce them later, rather than having to request large increases later.

Zahradka reiterated her concerns about the potential impacts and said she was unsure what the solution might be, though she wanted to bring the topic up.

Burnett moved on to discuss increases in utility investment fees, which he explained reflect the costs imposed by the demands new development places on the utility system.

He added that there has to be a “rational nexus” between the fees and the costs to serve new development.

For the water utility investment fee, he said that Willdan took a hybrid approach, incorporating both existing infrastructure costs and the costs of new assets like the water treatment plant.

He explained that Willdan worked to identify the maximum fees the city could charge, although the city does not necessarily have to charge them.

In the study, Burnett said that Willdan found, for example, that utility investment fees could increase from the current $9,000 to $12,866 for ¾-inch meters. For meters 4 inches or above, he said that maximum fees would actually decrease slightly, based on the study’s results.

Burnett explained that these reductions were due to different methodologies in calculating maximum charges in the new study compared to previous studies.

He said that the wastewater utility investment fees would not include any future expansions, since none are planned, and that this would result in overall decreases to wastewater utility investment fees.

This assessment could change if the city added new capital projects to the sewer system, he said, but he would recommend that the sewer utility investment fees be reduced in the current situation.

Burnett said he would recommend, for example, decreasing utility investment fees for one-inch meters from $14,400 to $5,609 and decreasing fees for six-inch meters from $384,000 to $111,945.

In response to a question from council, Burnett explained that the debt service for the recent construction of a new wastewater treatment plant was incorporated into the wastewater utility investment fees, although this cost did have to be balanced between rate increases and these fees to ensure that customers were not being double-charged for the same increases.

Plata said that the increases in utility investment fees for water were partially offset by the decreases for wastewater, which might have a beneficial impact on development.

The council expressed general support for assessing the impact of saving for future sewer plant construction projects, although they did not commit to implementing these increases.

Wilson summarized the council’s preferences as pursuing WIFIA funding, focusing on option two for water rates with potential further increases for higher water use, and pursuing implementation of county rates for wastewater.

Plata thanked Burnett for providing a “great overview of a really complicated topic.”

In an interview, Wilson explained that the next steps for the rate study will include a draft report from Willdan on proposed rates, on which the city council will provide comments.

The rate increases will also move through the city budgeting process, which will include a public hearing and culminate in the city adopting a rate resolution for 2027 that sets rates.

She added that the rate study could potentially be adjusted in the future based on changes in the city’s financial situation and that rates must be set annually.