2021-080 Cost of ServiceDate: October 1, 2021 Report No. 2021-080
INFORMAL STAFF REPORT
TO MAYOR AND CITY COUNCIL
SUBJECT: Water Cost of Service Study
BACKGROUND: On September 28, 2021, the City Council approved the FY 2021-22 water rates. The rates include a new rate structure for residential customers to further incentive water conservation.
DISCUSSION: The City contracted with Raftelis to update the City’s Water and Wastewater cost-of-service and
rate design study. Raftelis provided expertise in reviewing all cost (both direct and indirect) and
revenue requirements, which helps ensure rates are equitably designed among all rate classes. The
cost-of-service studies for the utilities are updated approximately every five years. During interim
years, staff from the Finance, Water and Wastewater Departments update the model.
The results of the cost-of-service study was discussed with the Public Utilities Board (PUB) and
City Council during the FY 2021-22 budget process. The purpose of this Informal Staff Report is
to provide both the PUB and City Council a copy of the final report.
STAFF CONTACT: Nick Vincent Assistant Director of Finance
nicholas.vincent@cityofdenton.com
REQUESTOR: Staff
PARTICIPATING DEPARTMENTS: Finance
STAFF TIME TO COMPLETE REPORT: Staff – .5 hours
ATTACHMENTS Water and Wastewater Cost of Service Study
1.1.1.
2021 Financial Plan and Rate Design
Study
September 1, 2021
City of Denton
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3755 South Capital of Texas Highway, Ste. 155
Austin, TX 78704
www.raftelis.com
August 1, 2021
Stephen Gay
Director of Water and Wastewater Utilities
901-B Texas St.
Denton, TX 76209
Subject: 2021 Financial Plan and Rate Design Study
Dear Mr. Gay,
Raftelis Financial Consultants, Inc. (Raftelis) is pleased to provide this Rate Study Report (Report) for the 2021
Financial Plan and Rate Design Study (Study). This report will provide a summary of the work completed for the
City of Denton Water and Wastewater Utility (Utility).
This report will provide:
Overview of the Utility,
A description of the financial results of the Utility, and
Recommendations for rate design changes
It has been a pleasure working with you to complete this final product. We thank you and the City staff for the
support provided during the course of this study.
Sincerely,
Angie Flores
Senior Manager
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Table of Contents
1. EXECUTIVE SUMMARY .......................................................... 1
1.1. DESCRIPTION OF THE UTILITY .............................................................. 1
1.2. OBJECTIVES OF THE STUDY ................................................................. 1
2. FINANCIAL PLAN .................................................................... 1
2.1. WATER FINANCIAL PLAN ....................................................................... 1
2.2. EXISTING WATER RATES ....................................................................... 2
2.3. FORECAST OF WATER EXPENDITURES .............................................. 4
2.3.1. Operations and Maintenance Costs..........................................................................4
2.3.2. Water Utility Capital Improvements and Financing .................................................5
2.3.3. Water Impact Fees ......................................................................................................6
2.3.4. Total Water Revenue Requirements .........................................................................6
2.4. FORECAST OF WATER REVENUE ......................................................... 7
2.5. WATER UTILITY REVENUE SUFFICIENCY ............................................ 8
3. WASTEWATER FINANCIAL PLAN.......................................... 8
3.1. EXISTING WASTEWATER RATES .......................................................... 8
3.2. FORECAST OF WASTEWATER EXPENDITURES ................................. 9
3.2.1. Wastewater Utility Capital Improvements and Financing .....................................10
3.2.2. Wastewater ImpactFees ...........................................................................................11
3.2.3. Total Wastewater Revenue Requirements .............................................................11
3.3. FORECAST OF WASTEWATER REVENUE .......................................... 12
3.4. WASTEWATER REVENUE SUFFICIENCY ............................................ 13
4. DRAINAGE FINANCIAL PLAN .............................................. 13
4.1. EXISTING DRAINAGE RATES ............................................................... 13
4.2. FORECAST OF DRAINAGE EXPENDITURES ...................................... 14
4.2.1. Drainage Utility Capital Improvements ...................................................................14
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
4.2.2. Drainage Revenue Requirements ...........................................................................15
4.3. FORECAST OF DRAINAGE REVENUE ................................................. 15
4.4. DRAINAGE REVENUE SUFFICIENCY ................................................... 15
5. UTILITY FINANCIAL PLAN .................................................... 16
6. RATE DESIGN ....................................................................... 19
6.1. RATE DESIGN CHANGES ...................................................................... 19
6.1.1. Residential Rate Design...........................................................................................19
6.1.2. Commercial Irrigation Rate Design .........................................................................21
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
1.2. List of Tables
Table 1 Residential Base Rate Charges ........................................................................................................... 3
Table 2 Commercial/Irrigation Base Rates ...................................................................................................... 3
Table 3 Other Base Rates .................................................................................................................................. 3
Table 4 Volumetric Rates ................................................................................................................................... 4
Table 5 Water O&M ............................................................................................................................................. 5
Table 6 Franchise and Return on Investment Fees ........................................................................................ 5
Table 7 Capital Funding ..................................................................................................................................... 5
Table 8 Debt Service .......................................................................................................................................... 6
Table 9 Impact Fee Sources and Uses ............................................................................................................. 6
Table 10 Projected Water Revenues ................................................................................................................ 7
Table 11 Wastewater Base Rates...................................................................................................................... 9
Table 12 Volumetric Wastewater Rates ........................................................................................................... 9
Table 13 Wastewater O&M ............................................................................................................................... 10
Table 14 Franchise and Return on Investment Fees .................................................................................... 10
Table 15 Capital Funding ................................................................................................................................. 10
Table 16 Debt Service ...................................................................................................................................... 11
Table 17 Wastewater Impact Fees .................................................................................................................. 11
Table 18 Projected Wastewater Revenue ...................................................................................................... 12
Table 19 Drainage Rates .................................................................................................................................. 14
Table 20 Drainage O&M ................................................................................................................................... 14
Table 21 Capital Funding ................................................................................................................................. 14
Table 22 Debt Service ...................................................................................................................................... 15
Table 23 Reserve Balance Targets ................................................................................................................. 17
1.3. List of Figures
Figure 1 Water Revenue Requirements ........................................................................................................... 7
Figure 2 Water Fund Performance.................................................................................................................... 8
Figure 3 Wastewater Revenue Requirements ............................................................................................... 12
Figure 4 Wastewater Revenue Sufficiency .................................................................................................... 13
Figure 5 Drainage Revenue Requirements .................................................................................................... 15
Figure 6 Drainage Revenue ............................................................................................................................. 15
Figure 7 Drainage Revenue Sufficiency......................................................................................................... 16
Figure 8 Utility Financial Plan ......................................................................................................................... 17
Figure 9 Ending Cash Balance........................................................................................................................ 17
Figure 10 Debt Service Ratio ........................................................................................................................... 18
Figure 11 Bill Distribution ................................................................................................................................ 20
Figure 12 Proposed Residential Rates ........................................................................................................... 20
Figure 13 Proposed Rates Versus current Rates ......................................................................................... 20
Figure 14 Residential Water Bill Comparison at 5,000 Gallons .................................................................. 21
Figure 15 Proposed Irrigation Rates .............................................................................................................. 22
Figure 16 Irrigation Bill Comparison at 42,000 Gallons ............................................................................... 24
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
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CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
1. General Summary
1.1. Description of the Utility
The City of Denton (City) is located in north Texas and is the county seat of Denton County. Denton is home to two
state universities, the University of North Texas and Texas Woman’s University. The City has an estimated
population of 140,956. The City’s utility system provides electric, water and wastewater services. This report
discusses the water and wastewater utilities.
The water utility provides service to approximately 38,000 retail water customers and treats roughly 30 million
gallons of water per day. In addition, the City also provides service to wholesale customers.
The wastewater utility provides wastewater service to approximately 36,000 retail sewer customers. Similar to Water,
the City also provides service to wholesale customers. This includes the treatment and collection of the wastewater
for these customers. Wastewater treatment is provided by the Pecan Creek Water Reclamation Plant, which treats
up to 15 million gallons of wastewater per day.
1.2. Objectives of the Study
The City of Denton (City) engaged Raftelis Inc. to complete a comprehensive Water and Wastewater Financial Plan
and Rate Design Study (Study) to determine the necessary level of rate revenue required to meet annual operating
expenses, payments on existing and proposed debt service, and fund capital expenses over the next three years. Along
with the analysis, Raftelis developed a financial planning model that may be used to evaluate future operating or
capital scenarios.
The major objectives of the study include:
» Determine the revenue required to support water and wastewater operations, including current and planned
capital for the next five years,
» Evaluate and update if necessary, the existing tiered rate structure design and determine future impacts on
consumption patterns,
» Develop strategies for implementing significant rate changes to reduce the adverse impact on customers, and
» Evaluate the current rate structure and recommend improvements or revisions to the rate structure.
2. Financial Plan
2.1. Water Financial Plan
The objective of the financial planning process is to determine the level of water revenue required (Revenue
Requirement) to fully support the Utility for a forecast period. This process provides the Utility with the information
to maintain a sustainable utility.
The results of this study are presented for a five-year forecast period. The five-year forecast period allows the Utility
to evaluate how changes to the operating and capital budgets may affect rates and allows the City to plan accordingly.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Raftelis worked with Finance and Utility staff to help forecast expenses and capital expenditures to project any
revenue increase needed to fully recover the revenue requirement.
The following steps were necessary to perform the five-year forecast:
1) Forecast customer units of service,
2) Forecast operation and maintenance (O&M) expenditures,
3) Forecast capital expenditures and debt service, and
4) Develop a cash flow forecast summarizing planned O&M and capital expenditures, recommended rate
revenue increases and operating reserve levels.
2.2. Existing Water Rates
Table 1 through
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Table 4 show the existing water rates. The rates vary by customer class. Rates are made up of base rate charges and
volumetric rates. Customers located outside the city limits pay rates 1.15 times the rates below. The customer classes
include residential, commercial/irrigation, fire hydrant and wholesale customers.
Table 1 Residential Base Rate Charges
Meter Size Base Rate
3/4" 15.84
1" $20.59
1.5" $26.93
2" $34.06
Table 2 Commercial/Irrigation Base Rates
Meter Size Base Rate
3/4" $22.37
1” $31.68
1.5” $38.31
2” $50.99
3” $109.3
4” $216.71
6” $296.21
8” $415.01
10” $594.00
Table 3 Other Base Rates
Meter Size Base Rate
Fire Hydrant $110.63
Wholesale
(Facility Charge) $288.75
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Table 4 Volumetric Rates
Tiers (Gallons) Rate/1,000 Gallons
Residential
Winter (November-April)
0 and above $4.05
Summer (May-October)
0-15,000 $4.05
15,001-30,000 $5.76
30,001-50,000 $7.95
50,001 + $10.64
Commercial
0 and above $4.34
Non-Residential Irrigation
Winter (November-April)
0 and above $4.34
Summer (May-October)
0 and above $6.00
Fire
0 and above $5.07
UTRW Raw Water (Linked to
Dallas)
0 and above $0.76
Lake Chapman Pass-Through
0 and above $.0275
Wholesale
0 and above $0.61
Demand Rate per MGD
Per MGD $667,879.00
2.3. Forecast of Water Expenditures
Raftelis reviewed historical financial results from the prior year and the Fiscal Year (FY) 2021 budget to determine
future operations and maintenance (O&M) costs. Through discussion with City staff future costs are determined.
Any projected non-recurring expenses or revenues are identified and removed from the financial forecast.
2.3.1. OPERATIONS AND MAINTENANCE COSTS
Raftelis developed the future years’ budgets for water based on the FY 2021 approved budget. The future years are
inflated according to appropriate inflation factors currently set at 3% per year. The transfers represent payments for
services rendered, such as payment for billing services and shared personnel expenses. Table 5 provides a summary
of the Water O&M expenses. The category represents the function where the cost is incurred.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Table 5 Water O&M
Category FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Production $7,691,614 $7,922,363 $8,160,034 $8,404,835 $8,656,980
Distribution $3,323,048 $3,422,740 $3,525,422 $3,631,185 $3,740,120
Admin $2,790,252 $2,873,960 $2,960,179 $3,048,984 $3,140,454
Utilities
Admin
$1,452,882 $1,496,469 $1,541,363 $1,587,604 $1,635,232
Metering $501,752 $516,805 $532,309 $548,278 $564,726
Lab $784,058 $807,580 $831,807 $856,762 $882,464
Sustainability $4,959,794 $5,108,588 $5,261,845 $5,419,701 $5,582,292
Transfers $5,262,865 $5,420,751 $5,583,373 $5,750,875 $5,923,401
Total $21,806,472 $22,460,667 $23,134,487 $23,828,521 $24,543,377
In addition to the O&M costs the Utility pays a 5% annual franchise fee to the City and a 3.5% return on investment
fee to the City. The fees are based upon rate revenue. The franchise fee is calculated within the model based upon
the model’s calculated revenue. Table 6 shows the estimated franchise and return on investment fees.
Table 6 Franchise and Return on Investment Fees
Category FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Franchise Fee $1,983,324 $2,097,972 $2,164,972 $2,207,676 $2,267,898
Return on Investment Fee $1,388,327 $1,468,581 $1,515,480 $1,545,373 $1,587,529
Total $3,371,651 $3,566,553 $3,680,452 $3,753,049 $3,855,427
2.3.2. WATER UTILITY CAPITAL IMPROVEMENTS AND FINANCING
The Utility uses a mix of cash, debt, and other funding sources to fund its capital improvements. Using the financial
planning model, the Utility analyzes each option to determine what is the optimal use of funds. Future debt service
is calculated for debt-funded projects in the Capital Improvement Plan (CIP) based on 4% interest, a 20-year term,
and payments starting one-year after bond issuance. Capital projects are included in the City’s CIP which include
water improvements and expansions.
Vehicle replacements are included in the CIP. Water impact fees only fund growth-related projects. Water impact
fees also assist in paying for growth-related debt service, as explained in Section 2.3.3. Table 7 shows the capital
funding by year.
Table 7 Capital Funding
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Auction Proceeds $92,000 $92,000 $92,000 $92,000 $92,000
Vehicle Fund Transfer $630,825 $630,825 $630,825 $630,825 $630,825
Water Aid in Construction $265,788 $271,104 $276,526 $282,056 $287,697
Water Cash-Funded Capital $13,237,140 $9,769,934 $9,110,512 $11,078,958 $8,230,357
Water Impact Fees $2,725,000 $1,154,000 $1,200,000 $45,000 $1,900,000
Total $16,950,753 $11,917,863 $11,309,863 $12,128,839 $11,140,880
In addition to the funding sources above, Denton will issue debt to pay for projects. The debt issued will cover any
shortfall between sources of funding and planned project expenditures.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Along with the proposed debt, Raftelis and staff went through the existing debt service and allocated it between water
and wastewater. Combined, the proposed and current debt service equals the total water debt service for the revenue
requirements. Table 8 displays the total debt service allocated to water.
Table 8 Debt Service
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Existing $10,901,425 $9,724,968 $7,446,318 $7,530,518 $7,542,918
Proposed $2,639,922 $5,162,706 $5,162,706 $5,248,543
Total Debt Service 10,901,425 $12,364,891 $12,609,025 $12,693,225 $12,791,462
2.3.3. WATER IMPACT FEES
Denton receives water impact fees each year from new connections and new development. Utility staff use the impact
fees to cash-fund growth-related projects, shown in Table 7, and to pay down growth-related debt. The actual
collection and spending of the fees are tracked in a separate account. For projection purposes Raftelis and City staff
assumed no growth in the collection of impact fees over the study period. Table 9 shows the sources and uses of the
impact fees.
Table 9 Impact Fee Sources and Uses
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Beginning Balance $14,671,129 $14,671,129 $14,671,129 $14,671,129 $16,971,129
Projected Impact Fee Revenue $6,605,000 $6,605,000 $6,605,000 $6,605,000 $6,605,000
Uses:
Cash Funding Capital $2,725,000 $1,154,000 $1,200,000 $45,000 $1,900,000
Debt Service $3,880,000 $5,451,000 $3,105,000 $6,560,000
Total Uses $6,605,000 $6,605,000 $4,305,000 $6,605,000 $1,900,000
Surplus/(Deficit) $2,300,000 $4,705,000
Ending Balance $14,671,129 $14,671,129 $16,971,129 $16,971,129 $21,676,129
2.3.4. TOTAL WATER REVENUE REQUIREMENTS
The revenue requirement combines the water O&M and debt service. Figure 1 displays the projected revenue
requirements for the next five years.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Figure 1 Water Revenue Requirements
2.4. Forecast of Water Revenue
Water revenue is composed of rate revenue, miscellaneous revenue, and impact fee revenue. Rate revenue is
calculated based upon the Utility’s water rate components, the fixed meter charge, and volumetric charge.
Miscellaneous and impact fee revenues are based upon budgeted numbers, as provided by the City. The impact fee
revenue explanation can be seen in section 2.3.3.
The rate revenue is derived from actual bills and consumption. Raftelis and Utility staff used budget projections and
historical growth to estimate the projected consumption and bills. For example, in 2023 bill growth is expected to
increase due to the beginning phase-in of the Hunter Cole Development. Throughout the study period Utility staff
project significant growth in consumption and bills.
In addition to the rate revenue Raftelis and Utility staff reviewed the miscellaneous revenue. Miscellaneous revenue
includes shut off charges, tap fees, connection fees, outside revenue, etc. Most of the miscellaneous revenue is
increased by 1% a year during the study period, but outside revenue is increased as growth occurs. Table 10 shows
the projected water rate revenue with no rate increases. Growth in revenue is occurring from inflation increases and
bill/consumption growth.
Table 10 Projected Water Revenues
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Minimum Charge 9,741,866$ 9,924,794$ 10,624,089$ 10,824,661$ 11,029,245$
Volumetric Charge 29,924,621$ 32,034,656$ 32,675,349$ 33,328,856$ 34,328,722$
Miscellaneous Revenue 2,854,164$ 2,882,508$ 2,910,446$ 2,938,804$ 2,967,571$
Impact Fees 6,605,000$ 6,605,000$ 6,605,000$ 6,605,000$ 6,605,000$
Total Revenue 49,125,651$ 51,446,958$ 52,814,885$ 53,697,321$ 54,930,538$
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
2.5. Water Utility Revenue Sufficiency
Combined, the revenue requirement and revenue form the revenue sufficiency. Currently the water Utility is
projected to not require any rate increases during the study period.
Figure 2 shows the projected water revenue sufficiency.
Figure 2 Water Fund Performance
3. Wastewater Financial Plan
The Wastewater Financial Plan follows the same planning process as the water financial plan. The review involves
an analysis of annual operating revenues, operations and maintenance expenses, and capital expenditures. The
objective of the planning process is to determine the level of wastewater revenue required (Revenue Requirement) to
fully support the wastewater utility going forward.
3.1. Existing Wastewater Rates
The Utility recovers the cost of operating the wastewater system by charging volumetric and rates. Volumetric rates
are based upon the amount of water used. Residential customers are charged a base rate and a volumetric rate.
Residential customers’ billed usage is based upon the winter averaging of December through February water usage.
Commercial billed usage is based at 95% of water usage. Outside customers are charged 1.15 times the relevant
wastewater rate.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Table 11 Wastewater Base Rates
Units Base Rate
Residential
All $11.00
Commercial
All $26.50
Equipment Services and
Eating Establishments
All $26.50
Wholesale
All $230.75
Categorical
All $400
Non-Categorical
All $50
Metered Wastewater
All $323
Table 12 Volumetric Wastewater Rates
Units (Gallons) Rate/1,000 Gallons
Residential
All $3.80
Commercial
All $4.85
Equipment Services and
Eating Establishments
All $6.75
Wholesale
All $2.60
Effluent
All $1.50
SCD
All $4.85
3.2. Forecast of Wastewater Expenditures
Raftelis developed the future years’ revenue requirements for wastewater based on the FY 2021 approved budget.
The future years are inflated according to appropriate inflation factors currently set at 3% per year, based on staff
input. The transfers represent inter-City payments for services rendered, such as payment for billing services and
shared personnel expenses. Table 13 provides a summary of the Wastewater O&M expenses. The category represents
the function where the cost is incurred.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Table 13 Wastewater O&M
Category 2021 2022 2023 2024 2025
Water Reclamation $4,959,794 $5,108,588 $5,261,845 $5,419,701 $5,582,292
Wastewater Collection $3,359,320 $3,460,099 $3,563,902 $3,670,819 $3,780,944
Field Service Group $1,333,005 $1,372,995 $1,414,185 $1,456,610 $1,500,309
Beneficial Reuse $1,319,163 $1,358,738 $1,399,500 $1,441,485 $1,484,730
Wastewater Laboratory $497,706 $512,637 $528,016 $543,856 $560,172
Industrial Pretreatment $732,044 $754,006 $776,626 $799,925 $823,922
Transfers $684,118 $704,642 $725,781 $747,554 $769,981
Total $22,220,303 $22,886,912 $23,573,520 $24,280,725 $25,009,147
In addition to the O&M costs the Utility pays a 5% annual franchise fee to the City and a 3.5% return on investment
fee to the City. The fees are based upon rate revenue. The franchise fee is calculated within the model based upon
the model’s forecasted calculated revenue. Below in Table 14 are the estimated franchise and return on investment
fees.
Table 14 Franchise and Return on Investment Fees
Category 2020 2021 2022 2023
Franchise Fee $1,259,155 $1,284,297 $1,344,239 $1,402,363
Return on Investment Fee $881,408 $899,008 $940,968 $981,654
3.2.1. WASTEWATER UTILITY CAPITAL IMPROVEMENTS AND FINANCING
The Utility uses a mix of cash, debt, and other funding sources to fund its capital improvements. The Utility analyzes
each option to determine what is the optimal use of funds. Future debt is estimated based on 4% interest, a 20-year
term, and payments starting one-year after issuance. Capital projects are the project included in the City’s Capital
Improvement Plan (CIP) which include wastewater improvements and expansions.
Vehicle replacements are included in the CIP. Wastewater impact fees fund growth related projects. Wastewater
impact fees also assist in paying for growth related debt service, as explained in. Table 15 shows the capital funding
by year.
Table 15 Capital Funding
2021 2022 2023 2024 2025
Auction Proceeds $184,000 $184,000 $184,000 $184,000 $184,000
Vehicle Fund Transfer $262,150 $262,150 $262,150 $262,150 $262,150
Wastewater Aid in
Construction
$82,000 $83,640 $85,313 $87,019 $88,759
Wastewater Cash Funded
Capital
$3,730,900 $3,719,077 $3,124,599 $3,132,537 $3,242,963
Wastewater Impact Fees $500,000 $151,444 $14,036 $146,000 $147,460
Total $4,759,050 $4,400,311 $3,670,098 $3,811,706 $3,925,332
In addition, to the proposed funding sources above, Denton will issue debt to pay for projects. The debt issued will
cover any shortfall between sources of funding and planned project expenditures.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Along with the proposed debt, Raftelis and staff went through the existing debt service and allocated it between water
and wastewater. Combined, the proposed and current debt service equals the total wastewater debt service for the
revenue requirements.
Table 16 displays the total debt service allocated to wastewater.
Table 16 Debt Service
2021 2022 2023 2024 2025
Existing $6,519,870 $5,792,443 $4,608,368 $3,528,968 $3,525,493
Proposed $2,442,902 $4,499,857 $5,450,310 $6,219,319
Total Debt Service $6,519,870 $8,235,345 $9,108,225 $8,979,278 $9,744,812
3.2.2. WASTEWATER IMPACT FEES
Denton receives wastewater impact fees each year from its new development. Utility staff use the impact fees to cash
fund growth related projects, see Table 15, and to pay down growth related debt. For projection purposes Raftelis
and City staff assumed no growth in the collection of impact fees over the study period. Table 17 shows the sources
and uses of the impact fees.
Table 17 Wastewater Impact Fees
2021 2022 2023 2024 2025
Beginning Balance $4,189,562 $4,189,562 $4,538,118 $5,024,082 $5,378,082
Projected Impact Fee
Revenue
$4,270,000 $4,270,000 $4,270,000 $4,270,000 $4,270,000
Uses:
Cash Funding Capital $500,000 $151,444 $14,036 $146,000 $147,460
Debt Service $3,770,000 $3,770,000 $3,770,000 $3,770,000
Total Uses $4,270,000 $3,921,444 $3,784,036 $3,916,000 $147,460
Surplus/(Deficit) $348,556 $485,964 $354,000 $4,122,540
Ending Balance $4,189,562 $4,538,118 $5,024,082 $5,378,082 $9,500,622
3.2.3. TOTAL WASTEWATER REVENUE REQUIREMENTS
The total wastewater revenue requirement equals the wastewater O&M and debt service. Figure 3 displays the
projected revenue requirements for the next three years.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Figure 3 Wastewater Revenue Requirements
3.3. Forecast of Wastewater Revenue
Wastewater revenue is composed of rate revenue, miscellaneous revenue, and impact fee revenue. Rate revenue is
calculated based upon the Utility’s wastewater rate components, the fixed meter charge, and volumetric charge.
Miscellaneous and impact fee revenues are based upon budgeted numbers, as provided by the City. Impact fee
revenue can be seen in Section 3.2.2.
The rate revenue is derived from actual bills and consumption. Raftelis and Utility staff used budget projections and
historical growth to build the projected consumption and bills. For example, in 2023 bill growth is expected to
increase due to the beginning phase-in of the Hunter Cole Development. Throughout the study period Utility staff
project significant growth in consumption and bills.
In addition to the rate revenue Raftelis and Utility staff reviewed the miscellaneous revenue. Miscellaneous revenue
includes shut off charges, tap fees, connection fees, outside revenue, etc. Most of the miscellaneous revenue is held
constant during the study period, but outside revenue is increased as growth occurs. Table 18 shows the projected
wastewater rate revenue with no rate increases and projected miscellaneous revenue.
Table 18 Projected Wastewater Revenue
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Minimum Charge 5,448,178$ 5,556,561$ 6,019,089$ 6,138,890$ 6,261,087$
Volumetric Charge 19,734,922$ 20,129,379$ 20,865,698$ 21,908,379$ 22,565,268$
Miscellaneous Revenue 2,297,891$ 2,300,459$ 2,303,078$ 2,308,632$ 2,312,424$
Impact Fees 4,270,000$ 4,270,000$ 4,270,000$ 4,270,000$ 4,270,000$
Total Revenue 31,750,991$ 32,256,399$ 33,457,865$ 34,625,901$ 35,408,779$
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
3.4. Wastewater Revenue Sufficiency
Combined the revenue requirement and revenue form the revenue sufficiency. Currently the Wastewater Utility is
projected to not require any rate increases during the study period.
Figure 4 shows the projected wastewater revenue sufficiency.
Figure 4 Wastewater Revenue Sufficiency
4. Drainage Financial Plan
The Drainage Financial Plan follows the same planning process as the water and wastewater financial plan. The
review involves an analysis of annual operating revenues, operations and maintenance expenses, and capital
expenditures. The objective of the planning process is to determine the level of wastewater revenue required (Revenue
Requirement) to fully support the drainage utility going forward.
4.1. Existing Drainage Rates
Drainage rates are based upon total square feet for residential and based upon impervious area for commercial.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Table 19 Drainage Rates
Class Rate
Residential (Square Feet)
0-600 $0.50
601-1,000 $1.00
1,001-2,000 $3.35
2,001-3,000 $5.45
3,001-4,000 $7.60
4,001-5,000 $9.75
5,001-6,000 $12.00
6,001+ $15.50
Commercial
Square Foot of Impervious Surface $0.00186
4.2. Forecast of Drainage Expenditures
Raftelis developed the future years’ budgets for drainage based on the FY 2021 approved budget. The future years
are inflated according to appropriate inflation factors currently set at 3% per year. The transfers represent inter-City
payments for services rendered, such as payment for billing services and shared personnel expenses. Table 20
provides a summary of the Drainage O&M expenses. The category represents the function where the cost is incurred.
Table 20 Drainage O&M
Category 2021 2022 2023 2024 2025
Drainage $1,882,869 $1,939,355 $1,997,536 $2,057,462 $2,119,186
Watershed Protection $898,740 $925,702 $953,473 $982,077 $1,011,540
Transfers $684,118 $704,642 $725,781 $747,554 $769,981
Total $3,465,727 $3,569,699 $3,676,790 $3,787,094 $3,900,706
4.2.1. DRAINAGE UTILITY CAPITAL IMPROVEMENTS
The Utility uses a mix of cash, debt, and other funding sources to fund its capital improvements. The Utility analyzes
each option to determine what is the optimal use of funds. Future debt is estimated based on 4% interest, a 20-year
term, and payments starting one-year after issuance. Capital projects are the project included in the City’s Capital
Improvement Plan (CIP) which include water improvements and expansions.
Vehicle replacements are included in the CIP. Table 21 shows the capital funding by year.
Table 21 Capital Funding
2021 2022 2023 2024 2025
Auction Proceeds $72,112 $72,112 $72,112 $72,112 $72,112
Vehicle Fund
Transfer
$44,000 $44,000 $44,000 $44,000 $44,000
Drainage Cash
Funded Capital
$1,599,610 $1,694,670 $1,774,690 $1,720,062 $1,662,682
Total $1,715,722 $1,810,782 $1,890,802 $1,836,174 $1,778,794
During the study period Denton does not plan to issue drainage debt. Table 22 displays the existing drainage debt
service.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Table 22 Debt Service
2021 2022 2023 2024 2025
Existing $276,439 $131,986
Total Debt Service $276,439 $131,986
4.2.2. DRAINAGE REVENUE REQUIREMENTS
The total drainage revenue requirement equals the drainage O&M and debt service. Figure 5 displays the projected
revenue requirements for the next five years.
Figure 5 Drainage Revenue Requirements
4.3. Forecast of Drainage Revenue
Raftelis and Utility staff reviewed the historical growth in drainage revenue to determine revenue projections
during the study period (1% increase in bills/consumption each year).
Figure 6 Drainage Revenue
4.4. Drainage Revenue Sufficiency
Combined the revenue requirement and revenue form the revenue sufficiency. Currently the Drainage Department
is projected to not require any rate increases during the study period. Figure 7 shows the projected drainage revenue
sufficiency.
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Drainage Revenue 5,457,888$ 5,512,467$ 5,567,592$ 5,623,268$ 5,679,500$
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Figure 7 Drainage Revenue Sufficiency
5. Utility Financial Plan
The Water and Wastewater (Drainage) Utilities financial plans are combined to form the combined Utility Financial
Plan. The Utility financial plan can be used to look at the Utility as a whole, which reflects the Enterprise Fund as
operated by the City. Typically, it is at this level that debt service coverage ratios are calculated. The Utility is forecast
to operate at a surplus throughout the study period. Figure 8 shows the projected financial results of the Utility,
comparing revenues to expenses.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Figure 8 Utility Financial Plan
In addition to the overall financial performance, the Utility fund balance and debt service ratio is monitored. The
Utility uses its fund balance to fund capital projects, respond to unexpected expenses, and to ensure liquidity for day-
to-day operations.
To ensure adequate reserves the Utility has established reserve targets for the Utility. The reserve targets are based
upon the total revenue requirement. The current Reserve Balance goals are listed in Table 23.
Table 23 Reserve Balance Targets
Fund Water Wastewater
Working Capital 8% 8%
Operating Reserves 25-42% 20-31%
Total 33-50% 28-39%
Operating Days (120-180 days) (100-140 days)
During the study period Raftelis assumed a 150-day requirement for Water and a 120-day requirement for
wastewater. During the study period it is projected that the Utility will not fall below these metrics. Figure 9 shows
the projected Ending cash balances and reserve target for the Utility.
Figure 9 Ending Cash Balance
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Debt service coverage measures the ability of a Utility to service its debt. The formula is shown below:
𝑅𝑒𝑟𝑒𝑛𝑟𝑒𝑟 − 𝑂&𝑀 − 𝑅𝑟𝑎𝑛𝑟𝑒𝑒𝑟𝑟
𝐷𝑒𝑎𝑟 𝑅𝑒𝑟𝑟𝑖𝑎𝑒
Denton targets a 1.25x coverage target. A target above one tends to be looked at favorably by rating agencies and
indicates greater ability service debt. Figure 10 shows the projected debt service ratio for Denton. It is not projected
to go below 1x during the study period.
Figure 10 Debt Service Ratio
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
6. Rate Design
Raftelis and Utility staff determined that there is no current need for rate increases as described in the sections above.
Once, the revenue sufficiency was assured, Raftelis and Utility staff reviewed the rate structures to determine if there
is a need to refine the current rate structures. Particularly emphasis was placed on the residential rate structures.
There are many different factors that are considered when reviewing rate structures, but the major factors/decisions
that determine a successful rate structure are listed below.
Important items for a successful rate structure:
1. Financially viable,
2. Promotes affordability,
3. Promotes revenue stability,
4. Easy to understand,
5. Billing System can implement proposed rate structure
A proposed rate design will recover the same amount of revenue as the current rate design, but in a different way.
For example, a uniform volumetric rate that recovers $10 million may be changed to a tiered structure that recovers
$10 million.
6.1. Rate Design Changes
Raftelis and Utility staff reviewed the rate structures for water and wastewater. Through this review it was determined
to focus on the residential water and commercial irrigation classes, keeping all other rate classes, including the base
rates, constant.
6.1.1. RESIDENTIAL RATE DESIGN
The current residential volumetric rate structure as described in
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Table 4 is based upon seasonal rates. During the Winter residential customers pay a uniform rate and during the
summer they pay a tiered rate. To promote simplicity an annual rate is proposed. The annual rate will be paid
throughout the year.
Raftelis and Utility staff worked to ensure that the annual rate promotes affordability and revenue stability for the
Utility. To meet these goals a tier was added between 0-5,000 gallons. Water usage in this tier could be considered
essential use as this is the typical or average use of a customer in the winter months. As Figure 11 shows, the majority
of customers have an average annual consumption below 15,000 gallons. This allows customers who conserve water
to receive a fair and low rate in the lowest tier.
Figure 11 Bill Distribution
To ensure little rate shock Raftelis and Utility staff kept the 0-15,000 gallon tier at or below the current rate, $4.05.
The tiers above 15,000 gallons see an increase in their per unit rate. Figure 11 shows that little consumption will be
impacted by this. The revenue recovered by the proposed rates will recover the current residential volumetric revenue.
Figure 12 shows the proposed residential rate structure.
Figure 12 Proposed Residential Rates
Figure 13 shows a comparison of the proposed rates versus the current summer rates.
Figure 13 Proposed Rates Versus current Rates
Tiers Bill Distribution Consumption
0-5,000 55%55%
5,000-15,000 34%30%
15,000-30,000 8%11%
30,000-50,000 2%3%
50,000+1%1%
100% 100%
Tiers Proposed Rates
- -5.00 3.63$
5.00 -15.00 4.05$
15.00 -30.00 7.12$
30.00 -50.00 9.53$
50.00 -+11.79$
Line No Current Summer Rates Proposed Rates $ Difference
1 - - 5.00 4.05$ 3.63$ (0.42)$
2 5.00 - 15.00 4.05$ 4.05$ -$
3 15.00 - 30.00 5.76$ 7.12$ 1.36$
4 30.00 - 50.00 7.95$ 9.53$ 1.58$
5 50.00 - +10.64$ 11.79$ 1.15$
Tiers (Thousand Gallons)
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Figure 9 shows that the median consumption for Denton is roughly 5,000 gallons. When designing the proposed
rate structure, the goal is to reduce the median bill. Figure 14 shows the comparison of a current residential bill and
a residential customer paying the proposed rate structure. The analysis assumes a 5,000 gallon per month user.
Figure 14 Residential Water Bill Comparison at 5,000 Gallons
6.1.2. COMMERCIAL IRRIGATION RATE DESIGN
The current commercial irrigation volumetric rate structure as described in
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Table 4 is based upon seasonal rates. During the Winter irrigation customers pay a uniform rate and during the
summer they pay a higher uniform rate. To promote simplicity an annual rate is proposed. The annual rate will be
paid throughout the year. The revenue recovered will stay constant. The majority of the consumption occurs in the
summer months, so the rate is weighted towards the current summer rate. Figure 15 shows the proposed irrigation
rates.
Figure 15 Proposed Irrigation Rates
Current Rate Proposed Rate $ Difference
+-+6.00$ 5.75$ (0.25)$
All Usage
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Figure 16 shows a comparison between the current winter, current summer, and proposed irrigation bills with 42,000
Gallons of usage.
CITY OF DENTON 2021 FINANCIAL PLAN AND RATE DESIGN STUDY
Figure 16 Irrigation Bill Comparison at 42,000 Gallons
7. Conclusions
Overall, the financial forecast of the City of Denton is favorable. It is recommended that the City review and update
the financial planning model annually to ensure that the assumption is up to date and that the rate assumptions do
not require changes. Any rate design changes should also be updated in the model and consumption tracked based
on the new design.