FINANCIAL ADVISORY BOARD AGENDA ITEM
ACTION REQUESTED:
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Approve the recommendations for electric and water utility rates for 2025 through 2027
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DEPARTMENT: Finance Department
SUBMITTED BY: Raymond Munch, Director
BOARD/COMMISSION REVIEW:
N/A
BACKGROUND:
Historically, the City of Naperville’s Electric and Water Utilities have engaged professional consultants to evaluate their financial condition periodically and set future utility rates. Each utility operates as a business entity and is accounted for separately from the general government finances. Utility rates are the primary revenue source, accounting for approximately 98% of total utility revenue.
In early 2024, each utility commissioned a rate study to evaluate current rates and recommend future adjustments. The Electric Utility retained the services of Utility Financial Solutions, LLC (UFS) and the Water Utilities retained the services of Carollo Engineers (Carollo). Staff from the respective utilities and the Finance Department worked with the consultants to develop financial models based on historical data and future assumptions, and each consultant used those models to recommended rates for 2025 through 2027.
DISCUSSION:
Naperville’s Electric and Water Utilities operate separately from each other and are unique, both operationally and financially. While each utility’s circumstances are unique, there are several common goals for the rate studies that include:
• Adequate funding for system operations and maintenance
• Long-term investment in capital assets
• Maintaining cash reserves according to policy
• Ensuring manageable debt service
Following is a summary of each rate study.
Electric Utility
The primary goals of the 2024 rate study for the Electric Utility were to stabilize cash reserves in light of declining energy sales, while sufficiently funding escalating capital improvement costs.
Since 2021, the Utility’s cash balance has steadily declined due to lower-than-expected energy sales. The decrease in energy sales can be attributed to the general trend in energy efficiency and the move towards self-generating solar energy. While customers use less energy, the demands on the system remain constant. The Utility must continue to provide reliable service to customers, including investment in infrastructure and emerging technology to operate the utility.
That issue has been exacerbated by supply chain issues and resulting cost escalations that have persisted since the pandemic. Long lead times for critical system components, such as transformers, cables and switches, have forced the Utility to maintain much higher inventories at far greater costs. Before 2020, the Utility maintained a warehouse inventory of 12 weeks and now operates a warehouse with three years of material.
To address these issues, UFS and staff recommend the following:
• Three-year rate adjustment averaging:
o 6.5% in 2025
o 5.1% in 2026
o 5.1% in 2027
• Adjustment of the Customer Charge over three years to better reflect cost of service
• Issuance of new debt in 2025 and 2026 totaling $17.5 million
The recommended adjustments result in an increase of approximately $8 per month on an average residential bill. Naperville would continue to maintain rates lower than ComEd for the foreseeable future.
Water Utilities
The primary goal of the 2024 rate study for the Water Utilities was to raise revenues necessary to fund significant capital improvement projects, including support for future debt service.
Over the next several years, the capital improvement program for water and wastewater assets is scheduled to grow significantly. Projects are being driven both by the age of the assets and regulatory requirements. A 2020 asset evaluation of the water distribution system found the City is more than 50 miles behind on water main replacements. A program that formerly replaced one mile of pipe annually has been ramped to three miles annually; however, that is still well behind the consultant's recommendation of 10 miles annually.
Similarly, a 2021 asset evaluation of the Springbrook Water Reclamation Center (SWRC) identified several major improvements that address mandated nutrient removal standards and capacity expansion, estimated at more than $180 million through 2030. The SWRC projects will encompass one of the largest capital improvements in the City’s history.
To address these issues, Carollo and staff recommend the following:
• Three-year rate adjustments averaging:
o 23% for water annually
o 10% for wastewater annually
• Increase the Outside City Surcharge to 30%
• Issuance of new debt in 2025 - 2027 totaling $81.6 million
The recommended adjustments result in an increase of approximately $12 per month on an average residential bill. Because a significant portion of the water bill is the cost of water through the DuPage Water Commission (DWC), the bill impact is 12%. Naperville would continue to maintain rates lower than the regional average of DWC communities.
Staff is seeking approval from the Financial Advisory Board on the recommendations of the 2024 rate study. Following the Financial Advisory Board review, the recommendations will be presented to the City Council for final approval and rate adoption.
Attachments:
• UFS electric rate study report
• Carollo water rate study report
• Meeting presentation slides