CITY COUNCIL AGENDA ITEM
ACTION REQUESTED:
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Conduct the first reading of an ordinance amending Title 8 (Public Utilities) Chapter 2 (Municipal Water and Sewer) Article C (Water and Sewer Rates, Connection Charges) and Chapter 3 (Utility Service) of the Naperville Municipal Code
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DEPARTMENT: Water Utilities
SUBMITTED BY: Darrell Blenniss, Director of Water Utilities
BOARD/COMMISSION REVIEW:
The Public Utilities Advisory Board (PUAB) reviewed Water’s proposed service levels and capital plan at its Feb. 28, 2024, meeting and unanimously approved staff’s recommendations.
The Financial Advisory Board (FAB) reviewed funding recommendations aligned with the PUAB-approved service levels at its Sept. 4 and Oct. 28 meetings. The FAB recommended exploring a scenario that leveraged existing low levels of debt to increase near-term borrowing, thereby lowering the initially proposed rate increase percentages. This amended scenario was presented at the Oct. 22 City Council budget workshop and approved by the FAB on Oct. 28.
BACKGROUND:
Serving approximately 45,000 customers and a population of more than 149,000, Naperville Water Utilities (Utilities) provides high-quality, reliable, and critical services to the community. Detailed financial planning, including annual budget development and periodic rate studies, is essential to provide continuity of services and sustainable capital investment.
The Water Utilities’ last rate study was conducted in 2021 to help plan for financial needs through 2024, with the City Council approving rate increases that went into effect in January 2022. With the Utilities now in the final year of the 2024 study, staff contracted with Carollo FMG to determine an appropriate financial plan through 2027 and a rate schedule for the next three years.
The 2024 rate study involved the creation of a revenue sufficiency model, a cost-of-service evaluation, an expanded capital improvement plan, and a review of the existing rate design, with all components evaluated to determine their sufficiency in meeting policy goals.
DISCUSSION:
Study Goals
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 will grow significantly due to the age of existing assets and regulatory requirements. The information supporting these needs was attained through a 2020 asset evaluation of the water distribution system, which found that the City is more than 50 miles behind on water main replacements. While replacement work has increased from one mile to three miles of pipe annually, it remains well behind consultant recommendations. In addition, a 2021 asset evaluation of the Springbrook Water Reclamation Center (Springbrook) identified several improvements necessary to address mandated nutrient removal standards and capacity expansion; this work comprises the largest capital improvement in the City’s history and will continue until 2030.
Due to the extensiveness of the asset evaluations and timing, these conclusions could not be included in the 2021 rate study, thus making them a primary driver in this year’s study. In addition to this primary goal, other considerations included sufficient revenue to cover maintenance and operating costs, and cost-of-service equity between customer classes,
Study Recommendations
Through the 2024 rate study, the Water Utilities developed the following recommendations that achieve approved service level goals, maintain compliance with the City’s financial policies, and maintain rate competitiveness in the residential and commercial spaces.
1. Implement staff-recommendation rate increases in alignment with service-level goals.
Carollo prepared a five-year revenue model as well as a three-year rate schedule. The attached schedule of rates and charges will provide sufficient revenues in the study years to address both anticipated operating expenses and the staff-recommended capital program. Revenues include issuing $120 million in new debt to assist with Springbrook’s capital program during the study years.
Under the proposed rates and financing plan, water rates increase 12% annually from 2025-2027, and wastewater rates increase 10% annually from 2025-2027. Initially, these percentages were 23% annually for water and 10% for wastewater, respectively. However, FAB’s September 2024 recommendation to take advantage of Water’s current low debt position and borrow in the short term resulted in a significant percentage reduction, which has been made possible through years of citywide debt reduction practices.
A thorough examination using American Water Works Association-approved methodologies determined that no cost-of-service adjustments between customer classes are required at this time.
2. Increase yearly capital investment to meet recommendations in the water distribution and Springbrook asset condition evaluations.
As noted earlier, the Water Utilities’ capital program is slated to grow over the timeframe of the rate study. The proposed rates and recommended borrowing allow the utility the financial means to achieve its capital program and align with recommendations in both its water distribution and Springbrook asset condition evaluations. By the end of the rate study timeframe, water main replacement is anticipated to reach six miles per year, which aligns with the Utilities’ stair-step approach to moving toward consultant mileage recommendations. In addition, the necessary phases of construction and engineering work for the capacity and regulatory improvements at Springbrook are included.
3. Advance generational equity by supporting a blended pay-as-you-go/debt financing model for the expanded capital program.
The revenue model developed and recommended by staff uses a blended pay-as-you-go (rates) and debt financing plan, ultimately keeping rates and charges lower for the customer and furthering the concept of generational equity, which is the concept that all of those who will utilize a capital asset over a longer timespan contribute to the cost of that long-term asset. Due to years of focus on debt reduction and ongoing AAA bond rating, the City's strong financial position positions the Utilities well to assume an additional $120 million in financing. The City will still maintain sufficient debt ratio coverages that exceed industry averages for AAA-rated communities.
4. Maintain consistency with various fees and charges with peer communities in the region.
Under the proposed rates and financial plan, the average residential combined water/wastewater customer bill (defined as someone who uses 800 cubic ft/month) will see a 9.0% increase in 2025.
This remains competitive with other communities in the region. For communities in DuPage County that provide both water and wastewater service, the total average bill is $120. The proposed rates for 2025 would increase the average City residential bill to $110 per month, which would remain below the regional average.
Currently, unincorporated Naperville water customers pay a 10% surcharge on water rates or, put another way, have an out-of-city surcharge of 110% when considering the outside city rate as a percentage of the inside city rate. This means that these customers’ bills currently have wholesale, retail, and monthly customer service charge rates that are 10% higher than those of incorporated Naperville customers due to several factors, primarily the need for larger distribution and collection systems to service these areas.
During the consultant’s review of all rates and charges, the 110% out-of-city surcharge was found to be lagging behind others in the region, with some communities assessing a 150% charge. The rate consultant recommended increasing this surcharge to 130%, which remains below the current regional average of 41% (excluding Naperville).
Public Outreach
Following ordinance approval, the Water Utilities will work with the Communications Department to appropriately communicate rate changes to customers, including through the Connected resident newsletter included with utility bill mailings and the City’s website.
FISCAL IMPACT
Under the proposed rates and financial plan, the average residential combined water/wastewater customer bill (defined as someone who uses 800 cubic ft/month) will see a 9.0% increase in 2025.
This remains competitive with other communities in the region. For communities in DuPage County that provide both water and wastewater service, the total average bill is $120. The proposed rates for 2025 would increase the average City residential bill to $110 per month, which would remain below the regional average.