Study: NAU rates must go up to avoid debt

Without changes to water and sewer rates, Nassau-Amelia Utilities will deplete its fund balance, experience a negative cash flow and default on debt service payments by Fiscal Year 2022.

That message, presented to county commissioners at last Wednesday’s regular meeting, came with recommendations for changes in rates, fees and policies. However, not all the recommended changes were increases, and some customers would see reductions in their utility bills if the commission adopts the recommendations.

The Nassau County Board of County Commissioners provides water utility services to the south end of Amelia Island via NAU. Currently, the utility serves 252 commercial accounts, 308 multi-family clients and 2,659 residential customers. In addition, the utility provides service to 37 commercial irrigation accounts.

Burton and Associates Senior Vice President Andrew Burnham presented commissioners with the results of a rate study commissioned by the county and completed last year. The study examined the current and future status of the utility’s fiscal health using FY 2014-15 year-end fund balances and 2015 actual revenues adjusted for expected customer growth and changes in usage patterns.

“We looked at a multi-year cash flow simulation to measure the adequacy of the current rates to meet current and future cost requirements,” Burnham explained. “In terms of moving forward, your current rate indexing policy of (an annual 2.5 percent rate increase) was not sufficient to meet those identified cost requirements, nor the funding of the multi-year capital improvement program. In fact, if you (continue) down that path, you would be in technical default on your outstanding debt in 2022 and would have exhausted all fund balances in the utility at that time as well.”

Annual rate adjustments (rate index)

Currently, NAU rates are automatically increased by 2.5 percent annually – an increase that falls short of both industry standards and necessary revenue to fund needed capital improvements, Burnham said.

Charges and rate structures for the water side of the utility were updated in 2010 to bring the county into compliance with required Water Conservation District conservation rate structures, but did not address capital investments needs. Wastewater rates have not been adjusted for a much longer period of time, said County Manager Ted Selby.

Increasing the utility’s annual rate increase from 2.5 percent to 5 percent – a figure that Burnham said matches both national and regional industry trends – would help assure the county maintains an adequate fund balance and collects sufficient revenue to fund needed capital improvements, according to the Burton and Associates report.

Usage rates

While a bump in the annual rate increase would put NAU in a stronger financial position, Burnham recommended combining the across-the-board increase with changes to the current rate structure based on usage. By increasing rates for usage levels that currently are underpaying for service – according to regional industry standards – while decreasing rates for usage levels that more closely match with industry standards, Burnham said the county could secure the financial health of the utility with a more equitable rate adjustment.

In comparing NAU’s residential water and sewer bills for low-volume users - defined as a usage of 3,000 gallons, seen in 1- or 2-person households – NAU customers pay an average of $46.49 per month, which falls in the middle of the rates charged by other regional utilities. Equivalent monthly payments in surrounding counties ranged from $34.87 per month to $66.76 per month.

For an average residential user of approximately 6,000 gallons, NAU customers pay an average of $69.65 per month – again in the middle of surrounding county rates, which run from $50.86 to $104.05. However, high-volume residential users - those using 15,000 gallons each month, pay less per month for water and sewer than in any of the 12 surrounding communities identified in the study.

Additional adjustments

Burnham outlined several other changes recommended by Burton and Associates.

“Confirming with currently accepted industry practice doesn’t call for significant changes, but we do have a few minor modifications that we would recommend,” he said, identifying changes to rate tier divisions, adjusting fixed monthly charges, impact fee reductions and modifications to deposits and miscellaneous fees such as service calls and reconnection charges.

To bring the county’s rates and rate categories in line with standard practices and provide for a more stable and secure financial health outlook for the Nassau-Amelia Utilities, Burton and Associates recommended the following adjustments:

• A shift of the dividing line between first- and second-rate tier users, from 3,000 to 5,000 gallons.

• An increase in the fixed monthly water charge to approximate the average charge at comparable utilities and charge part-time residents equitably for on-demand water service availability. No increase to the fixed monthly charge for sewer service is recommended.

• Raise the residential sewer usage cap from 6,000 gallons to 10,000 gallons to capture the use of larger families.

• Update commercial usage rate to reflect the current cost of service.

The new rate structure, if approved, will “enhance affordability for low volume and average residential users and conform with local practices,” Burnham said.

Impact fees and capital charges

Due to depreciation of Nassau-Amelia Utilities’ infrastructure since utility impact fees were last adjusted, Burnham said the impact fees charged to development projects must be reduced to reflect existing assets. Burnham recommended a decrease in up-front impact fees of about $1,500 for a typical home or equivalent residential unit for water and sewer service.

As the county completes planned capital improvement projects, the impact fees could then be readjusted upwards to reflect the increased asset value.

One of the very strict guidelines about how impact fees have to be calculated, consistent with not only case law and legal precedent, but also the Florida Impact Fee Act, is that (impact fees) have to be based on the most current local data,” he said. “At this point we really need to adjust these to reflect the current cost of capacity of the system and then periodically update them to capture costs as you reinvest in your system.”

Allowance for Funds Previously Invested (AFPI) charges assessed on development would be eliminated under the proposed plan, as AFPI charges are typically seen in private utilities, but are not normally associated with public utilities.

The changes to development-based revenue will provide an incentive to development due to the reduction of up front costs, Burnham pointed out. He also recommended that impact fees be used to pay debt service on capacity expansion loans in order to shift the burden of expanded capacity away from ratepayers to a higher reliance on developers.

Deposits and fees

Various one-time or situational fees may see a “substantial” increase under the proposed plan, though specific increases were not identified in the presentation.

“It has been a number of years since there have been updates on miscellaneous fees and changes such as premise visits, reconnect fees, those type of things,” Burnham said. “Substantial adjustments to those fees are necessary as well … based on the pure cost of service - what it takes to have people go out and provide these services,” he said.

According to Burnham, the typical new residential customer with water and sewer service would experience an increase of $20 in their deposit - from $125 to $145.
The proposed rate adjustments will be scheduled for a public hearing prior to a commission vote to approve, modify or reject the proposal. A date for the public hearing has not yet been announced. A copy of the Burton and Associataes Powerpoint presentation will be posted online at www.nassaucountyfl.com. Visit the Nassau-Amelia Utilities Department webpage.

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