APPENDIX B

Report to: General Committee – Finance & Administrative           Date of Meeting: 2007-11-05

SUBJECT:                          Proposed 2008 Water/Wastewater Rate Increase

PREPARED BY:               Andrea Tang, Acting Manager, Financial Planning

RECOMMENDATION:

That the report dated November 5, 2007 entitled “Proposed 2008 Water/Wastewater Rate Increase” be received;

AND THAT staff be authorized to hold a public meeting on November 20, 2007 at 6:00p.m. on the proposed 2008 Water/Wastewater rate increase;

AND THAT the proposed 2008 Water/Wastewater rate increase be equivalent to the Region of York’s (“Region”) proposed increase of 6.35% (Appendix A – Region of York Water & Wastewater Increase from 2002 to Proposed 2008) resulting in an increase in the Town of Markham’s (“Town”) Water/Wastewater rate of $0.1006 per cubic metre (m3);

AND THAT in addition to the Region’s increase, a Water/Wastewater Infrastructure Surcharge of $0.4137 will be phased-in over 10 years effective January 1, 2008 with an increase of $0.0827/m3 (20% of total increase) in 2008 and an increase of $0.0621/m3 (15% of total increase) in 2009.  The remaining 65% increase of $0.2689 will be spread evenly over the following 8 years which is equivalent to an increase of $0.0336/m3 per year from 2010 to 2017 inclusive.  The Infrastructure Surcharge will be applied to the Water/Wastewater rate to address the ongoing replacement and rehabilitation requirements for Waterworks infrastructure.

AND FURTHER THAT any potential Infrastructure Surcharges in addition to the above will be brought forward to Council through the annual Water/Wastewater Reserve Update and Budget discussions.

PURPOSE:

The purpose of the report is to obtain authorization:

1.      to hold a public meeting on November 20, 2007 at 6:00 p.m. to discuss the proposed Water/Wastewater rate increase

to present at the public meeting a total Water/Wastewater rate increase of $0.1833 which includes an increase of $0.1006/m3 in matching to the Region’s proposed increase of 6.35% and an additional Water/Wastewater Infrastructure Surcharge of $0.0827/m3.

BACKGROUND:

A resolution was passed by Council in June 2002 stating “And that all further rate increases by Region of York be automatically met by the Town of Markham with a percentage equal to that of the Region”.  Historically, the Town receives projected water rate increases from the Region prior to the end of the year and, at a minimum, matches the Region’s Water/Wastewater rate increases following a public meeting and Council authorization towards the end of the year.

The Municipal Act (O.Reg. 244/02) requires a public meeting be held before passing a by-law imposing a Water/Wastewater fee or charge.  As in previous years, following approval of this report, staff will advertise notice of the public meeting via the “Town Page” in local newspaper and the Town’s webpage.

As outlined in the Water & Wastewater Reserve Study presentation made at the October 29, 2007 General Committee, a Water/Wastewater Infrastructure Surcharge in addition to the matching of Region’s increase is required to sustain the expected significant funding requirements for future capital replacement/rehabilitation costs of the Waterworks infrastructure.  5 options in implementing the rate increase were presented at the General Committee including:

Ø      Option 1: full rate increase in 2008

Ø      Option 2: phase-in evenly over 2 years

Ø      Option 3: phase-in evenly over 4 years

Ø      Option 4: phase-in evenly over 5 years

Ø      Option 5: phase-in over 5 years with 40% of total increase in 2008 while the remaining increase be spread evenly over the following 4 years

It was recommended at the General Committee that Staff provide other options including phase-in over 6 to 10 years.  These additional options are outlined in the “Options/Discussions” section.

In Spring this year, Waterworks staff held a Focus Group of Markham residents to gauge residents’ values on Water related topics.

The participants were confident that Waterworks was providing quality service which is consistent with overall quality delivered by the Town of Markham.  Residents tended to be more interested in conservation and how much they were using rather than the cost of water.

As discussed previously at General Committee, Staff is looking at a revised water structure that would support water conservation programs.  Staff will be reporting back to Committee in Spring 2008.

OPTIONS/DISCUSSIONS:

Region’s Increase

Based on discussions with the Region, the Region’s proposed Water/Wastewater increase is currently 6.35% effective April 1, 2008.  The recommendation is for the Town to match the Region’s 6.35% increase resulting in an increase to the Town’s Water/Wastewater rate of $0.1006m3 to $1.6844m3 effective January 1, 2008.

Water/Wastewater Infrastructure Surcharge

There have been an increasing number of burdens placed upon the Waterworks Department that supports a Water/Wastewater Infrastructure surcharge, such as:

1.         New Ministry Legislation and Regulations

2.         Aging Waterworks infrastructure and rising replacement costs

3.         Insufficient Waterworks Reserve

Hence, the Water & Wastewater Reserve Study, similar to the Life Cycle and Capital Reserve Study, will establish a planned program in addressing these burdens and in monitoring the adequacy of the Waterworks Reserve.

As a result of the Walkerton tragedy, new Ministry Legislation and Regulations, such as the Safe Drinking Water Act, 2002 and The Sustainable Water & Sewage Systems Act, 2002, have been implemented that require additional spending on water and sewer replacement, rehabilitation and maintenance.

The Ontario government has passed the Safe Drinking Water Act, 2002 which expands on existing policies and practices, and introduces new regulations to protect water quality through the control and regulation of drinking-water systems and drinking-water testing.

The Safe Drinking Water Act, Section 11, through the Drinking Water System regulation (O.Reg. 170/07), and the Municipal Licensing Program (required under O.Reg.188/03) require implementation of water system replacement, rehabilitation and maintenance programs in order to ensure that the water system is well maintained.  These programs will be planned and monitored through the Quality Management System being implemented for the operation of the water system.

Further, under the Safe Drinking Act (O.Reg. 453/07), submission of a financial plan for the water distribution system will be required as early as 2010.

The Sustainable Water & Sewage Systems Act, 2002, addresses the requirements for future water rate increases, including disclosure of the capital needs, and the plan to recover capital costs through rates.  Therefore, the Town is pro-active in addressing the funding requirements at this time in advance of pending legislation in relation to the financial plan.

2.  Aging Infrastructure and Rising Replacement Costs

The Waterworks infrastructure is aging with a significant portion of the infrastructure installed in the 1950’s.  Given the life cycle on this infrastructure ranges from 50 to 75 years, replacements/rehabilitation requirements are expected within the next 20 years.  Appendix B shows the types of Waterworks infrastructure, the life cycle on each type of infrastructure and the corresponding inventory as at December 31, 2006.

3.  Insufficient Waterworks Reserve

As of September 30, 2007, the Waterworks Reserve balance is $8.76M.

Historically, the Waterworks capital program has been limited/restricted to the available funding in the Waterworks Reserve.  This results in the deferral of capital projects.  The Water & Wastewater Reserve Study will provide a planned capital program while ensuring adequate funding in the Waterworks Reserve to sustain ongoing and future capital requirements.

With no Water/Wastewater Infrastructure Surcharge, according to the projected capital replacement/rehabilitation program as identified in the Water & Wastewater Reserve Study, the Waterworks Reserve will be fully depleted by the end of 2010.

Water & Wastewater Reserve Study

The Water & Wastewater Reserve Study addresses the ongoing replacement and rehabilitation requirements for Waterworks infrastructure and other Waterworks related capital assets, such as Fleet, Facilities and ITS infrastructure, over their useful lives.  In addition, funding for capital induced operating costs and non-replacement program costs are accounted for in the Study.

Industry standards, the consultant study from Delcan and other statistical construction data were used in determining the life cycle and asset replacement values.  The Water & Wastewater Reserve Study incorporates Waterworks asset inventory (as of December 31, 2006), life cycle assumptions and asset replacement values to project the major replacement/rehabilitation costs for the Town’s Waterworks infrastructure.

Future Waterworks capital budgets will be based upon the Water & Wastewater Reserve Study, and condition assessments will be performed to determine if the planned replacements are required.

Similar to the Life Cycle & Capital Reserve Study, the Water & Wastewater Reserve Study is based on a 20 year rolling period and it will be updated annually to account for new inventory.  In addition, there should be a policy of maintaining sufficient funds for the projected replacement/rehabilitation costs over the next 20 years and sustainable funds for the following 5 years of Operations.

FINANCIAL CONSIDERATIONS:

Infrastructure Surcharge

Options 1 to 5 were outlined in the Water & Wastewater Reserve Study presentation.  Based on recommendation from General Committee, more options such as a longer phase-in have been considered.

A phase-in evenly over a period longer than 7 years, based on the model assumptions, will result in a negative reserve balance in years with significantly high volume of infrastructure/rehabilitation requirements.

Therefore, the following 3 options have been added for consideration:

Ø      Option 6: Phase-in evenly over 6 years

Ø      Option 7: Phase-in evenly over 7 years

Ø      Option 8: Phase-in over 10 years with 20% of total increase in 2008, 15% of total increase in 2009 and the remaining increase spread evenly over the following 8 years

Below is a summary of the options that have been considered (Infrastructure Surcharge Only):

1.      Full rate increase of $0.3359/m3 starting in 2008

2.      Rate increase of $0.3451/m3 to be phased-in evenly over 2 years

Ø      (increase of $0.1725/m3 per year in 2008 & 2009)

3.      Rate increase of $0.3647/m3 to be phased-in evenly over 4 years

Ø      (increase of $0.0912/m3 per year from 2008 to 2011)

4.      Rate increase of $0.3752/m3 to be phased-in evenly over 5 years

Ø      (increase of $0.0750/m3 per year from 2008 to 2012)

5.      Rate increase of $0.3645/m3 to be phased-in over 5 years with 40% of total increase in 2008 and remaining increase spread evenly over the following 4 years

Ø      (increase of $0.1458/m3 in 2008 and $0.0546/m3 per year from 2009 to 2012)

6.      Rate increase of $0.3858/m3 to be phased-in over 6 years

Ø      (increase of $0.0643/m3 per year from 2008 to 2013)

7.      Rate increase of $0.3967/m3 to be phased-in over 7 years

Ø      (increase of $0.0567/m3 per year from 2008 to 2014)

8.      Rate increase of $0.4137/m3 to be phased-in over 10 years with 20% of total increase in 2008, 15% of total increase in 2009 and remaining increase spread evenly over the following 8 years

Ø      (increase of $0.0827/m3 in 2008, $0.0621/m3 in 2009 and $0.0336/m3 per year from 2010 to 2017)

Option 8 is recommended with a total water/wastewater increase (in addition to Region’s increase) of $0.4137/m3 to be phased-in over 10 years with 20% of the increase, or $0.0827/m3, implemented in 2008.  In 2009, there will be an increase of $0.0621/m3  which is equivalent to 15% of total increase and the remaining increase will be spread evenly over the following 8 years ($0.0336/yr from 2010 to 2017).

The rationale in recommending Option 8 is due to this having the longest phase-in period of the options considered while maintaining a positive reserve balance throughout the 25 year rolling period.

As outlined in the previous section, the Water & Wastewater Reserve Study will be updated annually.  Finance and Waterworks Staff will update the Reserve Study to review and account for new inventory, new programs and related capital induced operating costs, adjustments in replacement/rehabilitation costs and growth in the operating budget.

Given the year-to-year adjustments in the Reserve Study and to account for the items as discussed above, Staff will monitor the reserve balance to ensure that the recommended Infrastructure Surcharge and the rate increase in matching the Region’s increase can sustain the overall operations (both operating and capital programs) of the Waterworks department while maintaining a positive reserve balance during the 20 year rolling period.

Staff will provide an update to Council during the annual budget process.

Impact on Reserves

With the recommended increase, the Reserves will be at approximately $85M (Appendix C – Reserve Balance with Phase-In of Recommended Rate Increase – Option 8) at the end of the 20th year (year 2027).  Based on this model, sufficient funds should be available to sustain the following 5 years of Operations.

Impact to Residents & ICI Customers

An average household has water consumption of 365m3 per year.  With a total increase of $0.1833 increase/m3 (Region’s increase of $0.1006 and Town’s increase of $0.0827) in 2008, there will be an increase of $66.90 to an average household bill.  The impact on the top 10 ICI customers, including a health care provider, manufacturers, and hospitality providers, will range from $27K to $53K per year (Region’s increase $15K to $29K and the Town’s increase $12K to $24K).

RECOMMENDED

BY:    ________________________          ________________________

Barb Cribbett, Treasurer                     Andy Taylor, Commissioner

Corporate Services

ATTACHMENTS:

Appendix A – Region of York Water & Wastewater Increase (2002 to Proposed 2008)

Appendix B – Waterworks Infrastructure Inventory & Life Cycle

Appendix C – Reserve Balance with Phase-In of Recommended Rate Increase (Option 8)