Your Utility Rates In A Challenging Climate

Seattle Public Utilities has been presenting its updated six-year strategic plan and an accompanying six-year plan for the rates it will be charging its customers. The strategic plan provides a good summary of the challenges for the public utility company, including the factors leading to the new proposed rates. It also shows the impacts of changing priorities at the city, including environmental sustainability and racial equity.

SPU has three main businesses:  water, drainage and wastewater management, and solid waste (including garbage, recycling and food/yard waste). Since it is a public utility, these businesses are not run to make a profit; instead, revenues (and rates) are determined in order to cover projected expenses, including operations, administration, capital projects, taxes, and debt service.

The water-supply business is large and capital-intensive, with reservoirs both up in the mountains and within city limits, and thousands of miles of water pipes that must be maintained in working order. Water supply is a business that is managed by SPU on its own. The drainage and wastewater business is a joint operation with King County; each owns and maintains some of the infrastructure, and King County runs the treatment plants (and charges SPU for treatment service). The solid waste business is almost entirely contracted out to private waste-management companies; SPU’s capital investment is relatively small, mostly related to the two big transfer stations.

SPU and its sister organization, Seattle City Light, share a billing and customer-service system, including a call center. Each agency contributes to the costs of building, maintaining, staffing, and operating it.

SPU keeps separate financial models for each of the three businesses, including calculating separate rate plans for each to match each business’s ongoing expense profile (here’s a memo from the City Budget Office summarizing SPU’s finances). Two years ago, SPU’s projected rate plan had average increases of 5.2% across the three businesses. But there’s good news: SPU, through a lot of hard work, has brought that down to 4.2%.

Here’s how SPU accounts for the 4.2% rate increase: base inflation of 2.6%, service contracts, taxes, operations costs above inflation, and financial policies that require certain levels of liquidity.

But three factors kept the rate increases below projections. The factors are: decreased costs in borrowing; changed assumptions for the completion rate of capital projects; favorably renegotiated contracts with providers. 

The water and solid waste financials are reasonably straightforward: the water business is run in-house, and the solid waste business is almost entirely outsourced. But the drainage and wastewater business is much messier, due to the shared responsibilities with King County. Like the water business, it has an aging infrastructure that needs constant, large investments in maintenance and replacements. 

But for the next few years it also has one additional factor: the Ship Canal Water Quality Project. This $570 million project will correct a broken “combined sewer outflow” system in the Ballard, Fremont and Wallingford areas that can dump raw sewage into the Ship Canal during heavy rainstorms because sewage and storm runoff are being carried by the same pipes.

Seattle and King County signed a consent decree with the federal government several years ago committing to building out a new system with increased capacity that would minimize the chances of sewage outflows into the Ship Canal. That project started construction last year, and is now entering the most expensive phase of the construction for the next few years. It is expected to be completed by 2026. SPU is covering $262 million of the cost, and King County is picking up $175 million. Both entities will need to raise rates to cover these costs. 

The good news, as mentioned earlier, is that SPU landed a very sweet $192 million federal loan for the lion’s share of its capital costs for the project. And hopefully after 2026 when the project is complete and SPU (and King County) are only paying debt service for the Ship Canal project costs, the rate increases will both shrink and smooth out.

So what do the new water, drainage, wastewater and solid waste rates mean for our SPU bills? SPU expects that for a typical single-family home, the monthly bill will increase $15 this year, with smaller increases in the following years. An apartment will see an increase of about $4 per month this year, with slightly larger increases in the subsequent years. A convenience store will see its monthly bill go up by about $40 per month, with some variability in the coming years.

Of course, there is much more to the strategic plan than just rates. It includes a long list of initiatives and investments, spanning four themes: service, sustainability, equity, and affordability. The projects are described in detail in the plan.

Here are some other themes and issues that the strategic plan brings to light:

• Debt. SPU, like Seattle City Light and the rest of city government, manages its debt — and its credit rating — carefully. SPU has maintained a credit rating of AAaaa, essentially the highest level for a public utility company. In practice that makes it easier and cheaper for it to borrow money, saving large sums of money it would otherwise pay in interest on bonds and loans. The report notes, however, that the two main credit-rating agencies (Moody’s and Standard & Poor’s) recently raised concerns about the utility’s liquidity level (i.e. whether it has access to sufficient cash reserves to ensure that it can pay its debt service). As a result, SPU has increased its cash balances to appease the credit rating agencies rather than risk a hit to its rating.
• Utility taxes. When we said earlier that SPU runs as a break-even business with its revenues set to cover its expenses, that isn’t entirely true. SPU is a profit center for city government, except that rather than record the income as profit, the City of Seattle extracts it as a utility tax. This year, SPU is expecting to pay the city $123 million in utility taxes. The State of Washington caps Seattle City Light’s utility tax rate at 6%, but no such cap exists on SPU. The water business’s utility tax rate is 15.54%; the drainage/wastewater and solid waste tax rates are a bit lower.  Councilmember Alex Pedersen has recently raised concerns about the city’s heavy-handed approach to extracting that much money out of SPU.
• Homeless response and RV remediation. SPU is expecting to spend $1.8 million on cleaning up trash and RV remediation as part of the city’s “Clean Cities” initiative — though the money is coming out of the city’s General Fund, not out of SPU’s bottom line.

• SPU has been slowly scaling up both its trash pickup service, from 12-17 sites last year to 30 in 2021; as well as its mobile RV pump-out service (aiming for 50 sites this year). The RV pump-out service is intended to offset an ongoing SPU expense for responding to sewage spills from RVs, an increasing problem over the last few years.
  
• Sustainability. SPU has no lack of sustainability initiatives, including its “Share our Water” plan, its “Zero Waste” initiative, its effort to switch to a “green fleet” of vehicles, efforts to increase recycling, and waste diversion and prevention programs. It makes for a strange business model for SPU (and for City Light): conservation is the right thing to do, but if successful, it shrinks the size of the business (and the revenues it generates). Shrinking revenues is particularly bad for capital-intensive businesses; ideally the fixed-overhead costs of capital projects should be spread across as many customers as possible and over time become a smaller share of overall expenses, resulting in lower rates; but with decreased consumption, the opposite happens, and the inevitable result is that rates go up as the business shrinks. SPU is already seeing a slow decrease in consumption as Seattle embraces conservation and recycling; the tricks it used this time to keep rates increases smaller won’t prevent larger increases in the future. as the business scales down.
• Big risks. SPU’s business faces a wide variety of risks: large and small, likely and rare. The strategic plan includes a mapping of several of the risks they are managing, using a common format in risk-management circles: a matrix looking at both the likelihood of an event occurring, and the impact it is likely to have if it does.
  

• Climate change rightfully tops the list — though drill down further and it divides into several kinds of risks that require different types of management. Wildfires are one type, which threatens the city’s water supply up in the Cascades. Another closer to home is the threat of sea level rise, and the risks that it poses to regions of the city — most notably a large swath of the industrial lands and down to South Park.

The breadth and scope of the Strategic Plan is at once both necessary and eye-opening. We ask a lot of Seattle Public Utilities: deliver uninterrupted water, sewer and solid waste service; address climate change and environmental concerns, as well as race and social justice issues; promote conservation; adjust to changing work habits post-pandemic; keep the city clean during both a homeless emergency and a pandemic. 

And all the while keep rates low and still deposit $123 million into the city coffers.