1. Audit of Water System Operations: Rate Structure 4C FIY Office of the City Auditor
or
DENTON Accountability • Transparency • Integrity • Quality
The City of Denton's current water
'' rate structure is designed to
incentivize reductions in discretionary
1'
water usage; however, current
DENTON residential consumption blocks are
too large to effectively impact
customer water usage.
Additional communication strategies
_ and targeted demand reduction
programs could help further decrease
water demands, ultimately helping to
defer costly water infrastructure
capacity expansions.
Audit of Water System
Operations
Rate Structure
Audit Team
City Auditor
Madison Rorschach, CIA, CGAP
Audit Staff
Neeraj Sama, MBA
215 E. McKinney St., Denton, TX 76201 • (940) 349-7228
Audit of Water System Operations: Rate Structure June 2021
Table of Contents
Auditat a Glance .........................................................................................................3
Introduction ...................................................................................................................4
Management Responsibility......................................................................................4
Audit Objectives, Scope, and Methodology..........................................................4
Findings & Analysis........................................................................................................6
Residential Rates do not Effectively Discourage Discretionary Use...................... 6
Expanded Use of Commercial Irrigation Meters Would Increase Demand
ManagementFlexibility ........................................................................................... 10
Communication of Residential Rate Structure Could be Improved................... 12
Demand Reduction Programs are Largely Reactionary...................................... 14
Wholesale Customers Accurately Billed; Contract Is Expired .............................. 15
Appendix A: Management Response Summary..................................................... 18
Appendix B: Peer City Benchmarking Study Results ...............................................21
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Audit of Water System Operations: Rate Structure June 2021
Audit at a Glance
Why we did this Audit: What we Found:
Annually, the City collects about This audit generally evaluated the City's water
$38 million in revenue from the sale demand management strategies including rate
of water to fund water system structure and demand reduction programs and
maintenance and improvements. incentives. Findings about each of these demand
Effective management of water reduction strategies are summarized below:
demand through these rates is Rate Structure. In general, the City's residential rate
critical to efficiently utilize limited structure is designed to encourage reductions in
water resources and defer water demand usage through seasonal, increasing
capacity expansion costs. This audit block rates; however, based on analysis of historical
project was included on the City's residential water usage, the consumption blocks
fiscal year 2020-21 Audit Plan as appear to be too large to effectively influence
approved by the City Council. This customer behavior. Additional education about the
report details findings and rate structure may further help reduce water
recommendations from phase one demands.
of the project.
On the other hand, the City has created an irrigation
What we Recommend: subclass of residential and commercial customers.
The irrigation rate structures of these subclasses
Recommendation 1 appear to be generally effective. Additional usage of
Adjust residential rate structure to these customer subclasses, particularly on the
more effectively incentivize commercial side, would allow for better monitoring of
reductions in discretionary water discretionary water usage for landscape irrigation.
usage.
Demand Reduction Programs and Incentives. The City
Recommendation 2 has largely not established any targeted demand
Consider requiring commercial reduction programs or incentives. Implementation of
irrigation systems to be separately an automated metering infrastructure (AMI) would
metered. aid the Water Department in identifying opportunities
Recommendation 3 & 4 for effective water reduction programs and
Provide additional information to incentives.
customers on the water rate Wholesale Water Customers. The City sells significant
structure and its intended impacts. quantities of raw and treated water to the Upper
Recommendation 5 Trinity Regional Water District at wholesale rates.
Consider implementing water Based on the adopted rate ordinance, these
demand reduction incentives and customers generally appear to be billed accurately.
programs. That being said, the City's contract with the Water
District is currently expired, potentially leaving the City
Recommendation 6 & 7 Formally execute a contract with vulnerable if a drought or water shortage were to
the City's wholesale water occur.
customers.
Audit report translations may be requested by emailing InternalAudit@CityofDenton.com.
Audit of Water System Operations: Rate Structure June 2021
Introduction
The Internal Audit Department is responsible for providing: (a) an independent
appraisal' of City operations to ensure policies and procedures are in place and
complied with, inclusive of purchasing and contracting; (b) information that is
accurate and reliable; (c) assurance that assets are properly recorded and
safeguarded; (d) assurance that risks are identified and minimized; and (e)
assurance that resources are used economically and efficiently and that the
City's objectives are being achieved.
The Internal Audit Department has completed a performance audit of the City's
water utility system's rate structure. We conducted this performance audit in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objectives.
Management Responsibility
City management is responsible for ensuring that resources are managed
properly and used in compliance with laws and regulations; programs are
achieving their objectives; and services are being provided efficiently,
effectively, and economically.
Audit Objectives, Scope, and Methodology
The Internal Audit Department has completed an audit of the City's water
system rate structure. This report is intended to provide assurance that the City
has effective strategies to manage water demand through rate structure and
demand reduction programs and incentives.
This report is the first phase in an audit project series covering water system
operations. Phase Two Distribution and Phase Three Production are expected to
be published over the next few months.
Audit fieldwork was conducted during May and June 2021 . The scope of review
varied depending on the procedure being performed. The following list
summarizes major procedures performed during this time:
v Reviewed documentation to develop criteria including industry standards,
best practices, policies, and procedures;
The City of Denton Internal Auditor's Office is considered structurally independent as defined by generally accepted
government auditing standard 3.56.
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Audit of Water System Operations: Rate Structure June 2021
➢ Analyzed the City's water rate structure and historical customer water
consumption to determine if the rate structure effectively influences water
demand;
➢ Interviewed City staff from the Finance Department and Sustainability2
and Customer Service Divisions;
➢ Examined the City's wholesale water contracts to determine if wholesale
water customers were being accurately billed;
➢ Evaluated the City's current water demand reduction programs and
incentives to determine if they appear to impact customer water usage;
and
➢ Conducted a benchmarking study in order to provide information on how
Denton's water rate structure and demand reduction programs and
incentives compare to peer municipalities.
2 The Sustainability Division is currently housed within the Solid Waste Department; however, it
provides education on a variety of sustainability efforts including water conservation.
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Audit of Water System Operations: Rate Structure June 2021
Findings & Analysis
The City of Denton currently owns and operates a municipal water utility, which
produces and delivers water to its customers. In order to sell water, the City must
obtain water rights from the Texas Commission on Environmental Quality, which
permits usage of raw water from the State of Texas's rivers, lakes, and aquifers.
Currently, the City has obtained the rights to use about 8.8 billion gallons of raw
water annually and has used an average of 7.1 billion gallons of water annually
over the last five years.
The City then pumps raw water through its two water treatment plants which
have the combined capacity to treat about 50 million gallons of water a day.
Water treatment facilities must be equipped to meet peak daily demand, which
can often be much higher than the average daily demand.
The treated water is then pumped out to the City's customers who generally
pay for the volume of water they consume per the City's adopted rate
ordinance. This process is broadly illustrated in Figure 1 :
Figure 1: Water System Operations Process
&am
❑ ❑ ❑ ❑ ❑
Intake Raw Water Treat Raw Water Consume Treated Water
As the City continues to grow, water demand will increase, requiring the City to
obtain additional water rights and invest in costly production capacity
expansions. For that reason, the City must be able to monitor and manage
water demand in order to efficiently and economically utilize its limited water
resources.
This audit generally evaluated the City's water demand management strategies
including rate structure and demand reduction programs and incentives.
Residential Rates do not Effectively Discourage Discretionary Use
Water demand is primarily managed through rate setting, as economic theory
suggests that the higher the price for a good, the lower the quantity demanded.
In general, the City has three significant classes of water consumers, which are
each charged different rates for water. Annual usage for these customer classes
is summarized in Table 1 .
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Audit of Water System Operations: Rate Structure June 2021
Table 1: Summary of Average Annual Treated Water Consumption
Avg. Annual Avg. Annual Avg. Consumption/
Category Customers Consumption Customer
(Million Gallons) (Million Gallons)
Residential 41,000 2,890.23 0.07
Commercial 6,000 2,439.05 0.39
Wholesale 2 88.85 44.45
Total: 47,000 5,997.94 0.13
Each of these classes is charged using a different rate structure, which will be
further explored throughout this report. For residential customers, the City has
implemented seasonal, block rates as shown in Table 2:
Table 2: Residential Rate Structure (FY20-21 )
Gallons Consumed Price Per 1,000 Gallon Price Increase
Winter Summer
0- 15,000 $4.05 $4.05 NA
15,001 -30,000 $4.05 $5.76 42%
30,001 -50,000 $4.05 $7.95 38%
Above 50,000 $4.05 $10.64 34%
In order for this type of rate structure to be effective, best practices suggest:
➢ Consumption blocks should be designed to impact discretionary usage,
so the first block should typically cover the amount of water needed for
normal household health and sanitary needs; and
➢ Price increases between blocks should be no less than 25 percent of the
previous block.
What We Found
• The City's residential consumption blocks appears to be too high to
effectively impact discretionary water usage.
o Based on analysis of historical residential water consumption data from
2018 through 2020, the average monthly usage per customer never
exceeds the 15,000-gallon Block One threshold as shown in Figure 2 on
the next page. Similarly, the average monthly usage per customer is
about 7,600 gallons.
o In addition, the average monthly residential usage during winter
months was almost 5,200 gallons - almost a third of the City's current
Block One consumption threshold. Best practices generally use the
winter month average as an indicator for the amount of water needed
for normal household health and sanitary needs.
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Audit of Water System Operations: Rate Structure June 2021
Figure 2: Average Residential Water Usage per Month
15000 Block One-Threshold----------------------------
a�
N 10000
o /
0 5000
C�
0
0
Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan.
Q Billed Month
2018 2019 2020
o Furthermore, while best practices would suggest that the rate increases
between each of the City's consumption blocks would be effective
price signals, very few residential customers ever consume water at
Block Three and Block Four levels even during the summer months as
shown in Figure 3.
Figure 3: Percentage of Residential Water Customers by Block
0 80%
0E 60%
� o
v 40%
� U
IL 20%
0%
Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan.
■Block 1 ■Block 2 Block 3 Block 4
• Based on a review of the City's utility rate books from fiscal year 2018-19
through fiscal year 2020-21 , the residential consumption block thresholds
have not been changed in at least three years.
o Based on discussion with Finance Department staff, the residential
block rate structure was evaluated as part of the City's most recent
Water and Wastewater cost of service study. As part of this study, the
block rate structure was identified as an area for improvement;
however, adjustments were not recommended for the fiscal year 2021-
22 budget year due to prioritizing changes in response to Winter Storm
Uri.
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Audit of Water System Operations: Rate Structure June 2021
• In addition, based on a review of ten peer cities,3 the majority had a lower
Block One consumption threshold than the City of Denton, with an average
threshold of almost 11 ,000 gallons.
Why It Matters
Effective management of water demand is critical to long-term deferral of
costly water system capacity expansions.4 While the City's current residential
rate structure appears to be designed to manage water demand by
discouraging discretionary water usage, the consumption blocks appear to be
too large to effectively incentivize customer behavior.
Similarly, block rate structures - if designed correctly- are generally considered
to more equitably distribute the cost of maintaining and expanding water
system infrastructure, as those customers who use more water- and drive peak
demand - are required to cover a larger portion of the cost.
Recommendation:
1. Adjust the residential consumption block thresholds to more effectively
incentivize reductions in discretionary water usage. Consumption block
thresholds should ideally coincide with differing usage patterns and price
increases between each block should reflect the marginal cost of
discretionary water demands to allocate supply costs equitably.
Water Department Comments: The residential rate structure was evaluated as
part of the Water and Wastewater cost of service study that was recently
completed by the City. Based on the findings, adjustments to the block rate
structure were not recommended for the upcoming fiscal year (21-22). Staff
will take into consideration the recommendations while reviewing and
updating the cost of service study in the future.
Finance Department Comments: A change to the residential block structure
was contemplated in the Water and Wastewater Cost of Service Study. Staff
plans to present rate structure changes for PUB and City Council
considerations during the FY 2021-2022 budget presentations.
3 Detailed results of the peer city benchmarking study can be seen in Appendix B.
4 For example, the City's planned 30 million gallons per day expansion of the Ray Roberts Water
Treatment plant is projected to cost $89.3 million.
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Audit of Water System Operations: Rate Structure June 2021
Expanded Use of Commercial Irrigation Meters Would Increase
Demand Management Flexibility
According to industry standards, lawn irrigation is generally the largest driver of
discretionary water usage during summer months. Based on best practices, a
water utility with a summer peak/winter average daily demand ratio greater
than 1 .6 generally has the potential for substantial water savings if landscape
irrigation demand management strategies are implemented.
The City of Denton has established a subclass of both the residential and
commercial customer types for separately metered irrigation systems. These
rates are outlined in Table 3.
Table 3: Irrigation Customer Rate Structure (FY21 )
Gallons Consumed Winter Price Per Gallon Summer Price Per Gallon
Residential Commercial Residential Commercial
0- 15,000 $4.05 $5.76
15,001 -30,000 $4.05 $4.34 $7.95 $6.00
Above 30,000 $4.05 $10.64
What We Found
• Based on daily water flow data received from the City's Water Department,
between 2018 and 2020, the City has the potential for water savings if
landscape irrigation demand management strategies are implemented.
These ratios can be seen in Table 4.
Table 4: Landscape Irrigation Potential Savings Indicator
Season Maximum Daily Flow Average Daily Flow
Winter 22.65 mg 14.82 mg
Summer 36.84 mg 23.78 mg
Summer Peak/Winter Average Ratio: 2.48
• Based on analysis of historical residential irrigation customer consumption,
consumption thresholds appear to be more effective than the regular
residential thresholds as average residential irrigation customer usage during
the summer months is about 14,600 gallons. That being said, this rate structure
is likely not having a significant impact on water demands as only about 200
residential irrigation customers exist.
• Based on analysis of historical commercial irrigation customer consumption,
this subclass consumes almost 10 percent of all treated and billed water
annually.
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o The increase between the winter and summer commercial water
irrigation rate is about 38 percent, well above the best practices
suggested 25 percent increase, suggesting that it would adequately
signal customers to reduce water demands during the summer.
• Commercial irrigation customers constitute almost 19 percent of the
commercial customer class. According to Water Department staff, separate
water meters may be installed for commercial customers upon request. There
is currently no requirement to separately meter commercial irrigation systems.
Why It Matters
The City of Denton currently charges commercial customers a flat rate for each
thousand gallons of water consumed. This practice appears to be reasonable,
as it is more difficult to determine what level of water usage is discretionary due
to the diversity of commercial customers. That being said, landscape irrigation is
generally considered discretionary water usage and is a key driver in peak
water demands.
Requiring separate water meters for commercial irrigation systems would allow
the City and customers to more accurately monitor water used for landscape
irrigation, creating additional rate structure flexibility and potentially allowing for
more equitable cost allocation.
Recommendation:
2. Consider requiring commercial customers to separately meter their irrigation
systems.
Water Department Comments: Requiring commercial customers to
separately meter their irrigation system may help in monitoring the
discretionary water use and allow for more equitable cost allocation but it
may put additional burden (cost) on the overall water utility operation as
well as the customer. The commercial customers (existing as well as new) will
incur additional expense for installing or retrofitting an additional meter as
well and conduct annual testing of the additional meter and the water
utility will incur costs for monitoring and maintenance of additional
infrastructure. Also, the water savings achieved by implementing this
recommendation may be low.
A compromise may be to work with the development team to institute this
requirement for new construction projects. In addition, existing connections
could be required to install irrigation meters when undergoing significant
improvements and remodels.
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Communication of Residential Rate Structure Could be Improved
According to best practices, in order to effectively communicate efforts to
reduce water demand through rate structure, utilities should:
➢ Educate customers about the rate structure;
➢ Use billing software that allows the customer to compare water use on
their bill with average water use for their customer class;
➢ Provide customers with their individual water use for the last 12-months;
and
➢ Clearly indicate the rate structure on the water bill.
What We Found
• Based on a review of the City's standard residential customer utility bill, there
is no explanation of how the billed amount is calculated including the shift
from winter to summer rates nor the block rate structure. In addition, the bill
does not include information on the average water use for the residential
customer class.
o Each bill does include a 12-month historical water usage graph, which
may help customers identify unusual or unexpected spikes in their
usage.
• That being said, the City does annually mail a utility rate brochure to all
customers in October of each year, which includes an explanation of the
residential seasonal, block rate structure. This brochure, and those for several
past fiscal years, can also be found online at the City's website.
Why It Matters
Without knowledge of the water rate structure, including the consumption
blocks and seasonality, it is unlikely that a customer will understand how they are
being charged for water usage, ultimately hindering any demand reduction
strategies in place. Additionally, ensuring that customers understand limitations
on water resources and the costs of additional capacity expansion is critical to
explaining water demand reduction strategies, otherwise customers may not
understand why they are being charged more for higher water consumption.
Currently, the City does not regularly provide clear information to customers on
why water rates are designed to discourage water usage. Similarly, while some
communication efforts are made to educate customers about the water rate
structure, this information is not provided regularly as part of customer bills and is
generally disbursed in October, just after the seasonal, block rates are no longer
in effect. More regular communications educating customers about the rate
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Audit of Water System Operations: Rate Structure June 2021
structure and its connection to water resource limitations that are timed just
before the peak water demand season may help to reduce customer water
usage.
Recommendations:
3. Include information about how residential water bills are calculated with
customer utility bills, especially when the block rate structure is in effect.
Customer Service and Public Affairs Department Comments: The City
currently produces and distributes a rate information brochure to all
customers in October. More descriptive information regarding rate structure
can be incorporated into this publication with other information being
included in the city website, Citizen Connection publication, and/or a billing
insert as needed. Space constraints may make it prohibitively difficult to
include valuable information on the bill itself.
Water Department Comments: We will work with the Customer Service
Division to implement this recommendation.
4. Consider providing customers with information about utility rates and the
benefits of water demand reduction strategies before the peak water
demand season.
Public Affairs and Customer Service Department Comments: The City
currently produces and distributes a water quality report to all customers in
May (before the peak season). More descriptive and compelling
conservation information can be distributed concurrently with this
publication with other information being included in the city website and
social media.
Water Department Comments: We will work with the Customer Service
Division to implement this recommendation.
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Demand Reduction Programs are Largely Reactionary
According to best practices, water utilities may create incentives or programs to
encourage water demand reduction. These types of incentives or programs are
generally most effective if the water utility understands its customer base and
conducts a thorough assessment of end-use water efficiency measures.
What We Found
• The City has generally not provided incentives for individual water use
reduction behaviors.
o According to Sustainability Division staff, the City has offered some
water-efficient plumbing fixtures to residents for free in the past as part
of their sustainability education classes. The effects of these efforts
have generally not been monitored.
o Based on a review of ten peer cities, six do not appear to offer any
type of financial incentive for individual water use reduction behaviors;
however, the remaining four generally offer rebates or utility bill credits
for the installation of water-efficient plumbing fixtures.
• The City has established a program to conduct on-site water audits for
customer properties upon request or in response to high-bill complaints.
Changes in water usage after a water audit is conducted from fiscal year
2016-17 through fiscal year 2018-19 are summarized by month in Table 5.
Table 5: Water Audit Usage Change Analysis
Audit Audits Avg. Usage Usage
Month Change Increases Decreases
Jan. 4 106% 3 1
Feb. 1 196% 1 0
Mar. 7 141% 6 1
Apr. 6 83% 6 0
May 3 29% 3 0
Jun. 7 -13% 2 5
Jul. 9 23% 3 6
Aug. 5 -21% 1 4
Sep. 8 -57% 1 7
Oct. 6 -54% 0 6
Nov. 6 -32% 2 4
Dec. 1 -26% 0 1
All: 63 19% 28 35
o Based on this analysis, there is not a clear pattern indicating that water
audits are an effective water demand reduction tool. Still, based on
discussion with Sustainability Division staff, they may be an effective
way to educate customers about the City's water rate design.
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Why It Matters
Water demand reduction incentives or programs can be effective ways to
target certain undesirable end-use water behaviors and improve overall water
system efficiency. Implementation of these types of programs could further help
the City reduce water demands and defer water system capacity expansions.
On the other hand, current water metering practices may hinder the City from
conducting the type of detailed end-use water analysis that would be needed
to effectively identify opportunities for targeted demand reduction programs
and incentives. Implementation of automated metering infrastructure (AMI)
could provide needed additional usage data to effectively create and monitor
these kinds of programs.
Recommendation:
5. Consider implementing water demand reduction programs and incentives
in order to further encourage water usage reduction. If incentive programs
are created, impacts on water demand should be monitored to ensure the
desired reductions are occurring. Implementation of automated metering
infrastructure would aid these efforts.
Water Department Comments: As recommended, water demand reduction
programs and incentives can be considered to encourage water usage
reduction after the City selects and implements the Automated Metering
Infrastructure (AMI) system. The system will help monitor water demand and
ensure that desired reductions are occurring. The Water Department is
currently working with a consultant to select the AMI system and develop an
implementation plan.
Wholesale Customers Accurately Billed; Contract Is Expired
Based on a review of the City's historical water consumption, about 75 percent
of billed water usage is charged to wholesale raw water customers, who use an
average of 4.6 billion gallons of raw water annually -just over half of the City's
8.8 billion gallons of raw water rights.
In addition, the City's two wholesale treated water customers are its largest
single consumers of treated water, together using about 88.9 million gallons of
treated water each year.
The rate structure for the City's four wholesale water customers is shown in Table
6 on the next page:
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Table 6: Wholesale Water Customer Rates
Customer Water Type Volume Charge Facility Charge Demand Charge/MGD
Sanger Raw $0.0275 NA NA
Sanger Raw $0.7578 NA NA
Sanger Treated $0.6100 $288.72 $667,879
Krum Treated $0.6100 $288.72 $667,879
What We Found
• Based on a review of wholesale water usage and bills for the last six months
(i.e. October 2020 through March 2021), wholesale water customers appear
to be accurately billed based on the adopted utility rates.
• That being said, the largest component of the wholesale treated water rate
is an annual demand charge which is spread out evenly across each
monthly bill. This demand charge is based on the peak daily rate of flow for
each wholesale treated water customer. According to Customer Service
staff, this peak rate of flow is periodically forecasted by the Upper Trinity
Water District, which is then used to calculate the demand charge.
o According to Customer Service staff, the peak rate of flow forecasts
have not been updated since 2017. In order to evaluate if the 2017
projects are still appropriate, the average rate of flow for each
wholesale treated water customer was calculated for the previous
twelve months and compared to the 2017 projections. The results of
this test are summarized in Table 7.
Table 7: Upper Trinity Regional Water District Flow Projections Evaluation
Projected (2017) Actual (2020)
Member Peak ROF Average ROF Average ROF
Sanger 0.50 mgd 0.20 mgd 0.27 mgd
Krum 0.20 mgd 0.10 mgd 0.11 mgd
o Based on the results of this test, the 2017 rate of flow projections may
be inaccurate for current billing, especially for Sanger.
• Based on a review of contract documents provided by the Water
Department, the City's wholesale water contract expired in 2012. At that
time, Water Department staff informally agreed to continue charging the
Upper Trinity Regional Water District at the same rates specified in the
original contract but did not formally execute a new agreement or
contract.
o According to City Staff, the City has been working on a new wholesale
water contract with the Upper Trinity Regional Water District since
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Audit of Water System Operations: Rate Structure June 2021
October 2020; however, a new agreement has not been executed
due to staff turnover.
o In the interim, the Water Department Director has sent a letter to the
Executive Director of the Upper Trinity Regional Water District offering to
sell a set volume of the City's raw water to the District for the 2021-2022
water year.
Why It Matters
The City of Denton's wholesale water customers are the City's largest single
consumers of water. For this reason, it is important that the City have an
adequate, valid contract in place to ensure water demand from these
customers is effectively managed and the City is protected in times of drought
or water shortage. In addition, these customers must be accurately billed to
ensure the City is appropriately recovering the cost of these services.
Recommendations:
6. Require the Upper Trinity Regional Water District to provide peak rate of flow
projections annually. Consider verifying these rate of flow projections each
year to further ensure that wholesale treated water customers are billed
accurately.
Water Department Comments: Staff will work with Upper Trinity Regional
Water District staff to develop and implement a process that would require
submittal of peak rate flow projections annually.
7. Formally execute a contract with the City's wholesale water customers.
Consider reassessing the wholesale water rates as part of this effort to ensure
the City is adequately recovering the cost of these services.
Water Department Comments: Water Department Staff has been actively
working on revising and executing the contract/agreement with the Upper
Trinity Regional Water District for the last few months. It is one of the top
priorities for Water Department Staff.
Finance Department Comments: Staff agrees with the recommendation and
is working with the Water Department to execute a formal wholesale
contract.
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Audit of Water System Operations: Rate Structure June 2021
Appendix A: Management Response Summary
The following summarizes the recommendations issued throughout this report. The
auditors found that staff and the Departments were receptive and willing to make
improvements where needed. Management has provided their response to each
recommendation.
Expected
Adjust the residential consumption block Completion:
1 thresholds to more effectively incentivize Concur Based on
reductions in discretionary water usage. Council
Direction
Water Department Comments: The residential rate structure was Responsibility:
evaluated as part of the Water and Wastewater cost of service Finance
study that was recently completed by the City. Adjustments to Department
the block rate structure are included in the findings and will be
presented to PUB and the City Council for consideration in July.
Finance Department Comments: A change to the residential
block structure was contemplated in the Water and Wastewater
Cost of Service Study. Staff plans to present rate structure
changes for PUB and City Council considerations during the FY
2021-2022 budget presentations.
Consider requiring commercial customers to Partially Expected
2 separately meter their irrigation systems. Concur Completion:
p y g y NA
Water Department Comments: Requiring commercial customers Responsibility:
to separately meter their irrigation system may help in monitoring NA
the discretionary water use and allowing for more equitable
cost allocation but it may put additional burden (cost) on the
overall water utility operation as well as the customer. The
commercial customers (existing as well as new) will incur
additional expense for installing or retrofitting an additional
meter as well and conduct annual testing of the additional
meter and the water utility will incur costs for monitoring and
maintenance of additional infrastructure. Also, the water savings
achieved by implementing this recommendation may be low.
A compromise may be to work with the development team to
institute this requirement for new construction projects. In
addition, existing connections could be required to install
irrigation meters when undergoing significant improvements and
remodels.
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Audit of Water System Operations: Rate Structure June 2021
Include information about how residential Expected
water bills are calculated with customer Completion:
3 utility bills, especially when the block rate Concur November
structure is in effect. (annually)
Customer Service and Public Affairs Department Comments: The Responsibility:
City currently produces and distributes a rate information Director of
brochure to all customers in October. More descriptive Public Affairs &
Customer
information regarding rate structure can be incorporated into Service,
this publication with other information being included in the city Customer
website, Citizen Connection publication, and/or a billing insert Service
as needed. Space constraints may make it prohibitively difficult Manager,
to include valuable information on the bill itself. Communications
Manager
Water Department Comments: We will work with the Customer
Service Division to implement this recommendation.
Consider providing customers with Expected
information about utility rates and the Completion:
4 benefits of water demand reduction Concur June
strategies before the peak water demand (Annually)
season.
Public Affairs and Customer Service Department Comments: The Responsibility:
City currently produces and distributes a water quality report to Director of
all customers in May (before the peak season). More descriptive Public Affairs &
Customer
and compelling conservation information can be distributed Service,
concurrently with this publication with other information being Communications
included in the city website and social media. Manager
Water Department Comments: We will work with the Customer
Service Division to implement this recommendation.
Consider implementing water demand Expected
5 reduction programs and incentives in order Concur Completion:
to further encourage water usage reduction. 2 to 5 years
Water Department Comments: As recommended, water Responsibility:
demand reduction programs and incentives can be considered Water
to encourage water usage reduction after the City selects and Department
implements the Automated Metering Infrastructure (AMI)
system. The system will help monitor water demand and ensure
that desired reductions are occurring. The Water Department is
currently working with a consultant to select the AMI system and
develop an implementation plan.
Require the Upper Trinity Regional Water Expected
6 District to provide peak rate flow projections Concur Completion:
annually. 6 months
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Water Department Comments: Staff will work with Upper Trinity Responsibility:
Regional Water District staff to develop and implement a Water
process that would require submittal of peak rate flow Department
projections annually.
Formally execute a contract with the City's Expected
7 wholesale water customers. Concur Completion:
September 2021
Water Department Comments: Water Department Staff has Responsibility:
been actively working on revising and executing the Water
contract/agreement with Upper Trinity Regional Water District Department
for last few months. It is one of the top priorities for Water
Department Staff.
Finance Department Comments: Staff agrees with the
recommendation and is working with the Water Department to
execute a formal wholesale contract.
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Audit of Water System Operations: Rate Structure June 2021
Appendix B: Peer City Benchmarking Study Results
Based on an evaluate of population, population growth, income per capita,
and estimated college enrollment, the following ten cities were included as part
of a water utility rate benchmarking study. As part of this study, the residential
and commercial rate structures of each city as well as the source of their
treated water was identified as shown in Table 8.
Table 8: Peer City Water Utility Rate Structure Summary
City Population Treated Water Source Rate Structure
Residential Commercial
Killeen 149,103 Wholesale Inclining Block Flat
McAllen 143,433 Treatment Plants Inclining Block Budget
Mesquite 142,816 Wholesale Inclining Block Same as Residential
Midland 142,344 Treatment Plant Inclining Block Same as Residential
Denton 138,541 Treatment Plants Seasonal Inclining Block Flat
Waco 138,183 Treatment Plants Inclining Block Flat
Carrollton 136,879 Wholesale Seasonal Inclining Block Flat
Richardson 120,981 Wholesale Inclining Block Same as Residential
Odessa 120,568 Treatment Plant Inclining Block Inclining Block
College Station 116,218 Treatment Plant Inclining Block Flat
Lewisville 106,586 Treatment Plant & Wholesale Inclining Block Flat
The residential inclining block rate structure of each city is illustrated in Figure 4
below:
Figure 4: Summary of Peer City Residential Block Rate Structure
80,000
70,000
60,000
50,000
0 40,000
O 30,000
20,000 1
■ 1 � 1
10,000 = , . . 1 1 , � •
S0 ova °S`'a -'o �\° aG°
°S0 c�a�d a Ga �o� S �a Go6�°
0
G
■Free Block ■First Block ■Second Block Third Block Fourth Block
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Audit of Water System Operations: Rate Structure June 2021
While all the reviewed peer cities use some form of an inclining block rate
structure, only one other city, Carrollton, uses this structure seasonally like
Denton. It should be noted that five of the benchmark cities include some
usage of water for free as part of the water service fixed cost.
The following table compares the prices of each peer cities water rate structure.
In general, Denton has the highest price increase from its first to last
consumption block; however, the volumetric charge for a very high usage bill is
just above the average volume charge of about $145 for all peer cities.
Table 9: Residential Rate Volumetric Price Comparison
First Block Total Price Volume Charge for:
City Price/1000G Increase from 5,000 10,000 30,000
First to Last Block Gallons5 Gallons6 Gallons?
Killeen $3.17 19% $9.51 $25.36 $98.15
McAllen $1.45 41% $7.25 $12.50 $54.70
Mesquite $6.58 24% $26.32 $61.72 $210.32
Midland $6.11 121% $18.33 $48.88 $223.33
Denton
Waco $2.66 144% $14.64 $32.95 $138.25
Carrollton $3.39 68% $10.17 $27.12 $123.77
Richardson $6.61 37% $33.05 $66.10 $211.75
Odessa $5.26 21% $15.78 $42.08 $164.58
College Station $2.75 120% $13.75 $27.50 $123.75
Lewisville $3.39 13% $10.17 $27.12 $95.67
Average: $4.13 70% $16.29 $37.44 $144.67
Finally, the following list presents the demand reduction programs and
incentives that the reviewed peer cities currently employ. Cities not included in
the list do not have any formal, advertised demand reduction programs or
incentives.
➢ Carrollton:
o Rebate of up to $5,000 for commercial customers who purchase
and install water-saving equipment.
➢ Odessa:
o Rebate for installation of high-efficiency toilets; and
o Rebate for installation of hot water recirculation pumps.
5 5,000 gallons represents Denton's average residential customer winter usage.
6 10,000 gallons represents Denton's average residential customer summer usage.
7 30,000 gallons represents Denton's very high usage residential customers as on average only
three percent of customers exceed this usage during a month.
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➢ College Station:
o Rebate for purchase of rain barrels.
➢ Lewisville:
o Utility bill credit for purchase and installation of low-flow toilets;
o Utility bill credit for purchase and installation low-flow showerheads;
o Utility bill credit for purchase and installation high efficiency washing
machines;
o Utility bill credit for purchase of rain barrels;
o Utility bill credit for purchase and installation of rain and freeze or
moisture sensors;
o Utility bill credit for adjusting their irrigation system as recommended
by a licensed irrigation system inspector; and
o Utility bill credit for purchase and installation of a smart irrigation
controller.
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