Water and Sewer 101
I am often asked about our water and sewer systems and the rates that we pay. So I thought I would put pencil to paper (metaphorically) and explain the process of setting the rates and answer some frequently asked questions.
Overview
Bloomfield Township owns and operates its water and sewer systems that transport water to our residents and businesses and then transports the sewage away. On either end of the system, we connect to a regional service provider as shown in the picture below:
The Bloomfield Township Water and Sewer Roadmap
Our water is purchased from the Southeastern Oakland County Water Authority (SOCWA), a regional water authority chartered under PA 196 of 1952. SOCWA gets its water from the Great Lakes Water Authority (GLWA) formerly known as the Detroit Water & Sewerage Department (DWSD). Then the township’s pipes (water mains) transport that water to each customer. The sewage is then transported in the township sewers to the Evergreen Farmington Sewage Disposal System (EFSDS) which is owned and operated by the Oakland County Water Resources Commissioner (OCWRC), and it in turn sends its treated water back to GLWA for final processing. So when you think about the cost of your water, you should think about:
The cost of the water purchased from SOCWA (which includes all of their costs of getting the water from GLWA and transporting to us);
The cost of transporting the water to our customers (from the SOCWA connection to each water customer’s tap via the township’s water mains);
The cost of transporting the sewage away from the customers (from the customer’s sewer connection to the EFSDS connection via the township’s sewers);
The cost of the sewage treatment by EFSDS (which includes all of theirs and GLWA’s costs of treatment and disposal).
There is more to your water cost than simply the cost of the water from SOCWA, and more to the sewer cost than just the disposal. Our township water and sewer system requires operating and maintaining, which requires trained and licensed professionals and regular maintenance of the physical infrastructure. Furthermore, as one of the older communities in the area, we have some water mains that are almost 100 years old! Over the last 15 years the township has embarked on a capital improvement program to upgrade our oldest pipes and enlarge many others. To fund this program the township has included some dollars into its annual water & sewer budget and it has also issued bonds for larger projects. The cost of servicing those bonds is also part of the annual rate setting.
Here are a few of the most commonly asked questions I get:
Question 1. How are the annual water and sewer rates determined?
It first will help to understand the nature of each component of the township’s costs in providing water and sewer services. In any given year, the township’s costs are:
The cost of water from SOCWA - VARIABLE (with a small fixed charge)
The cost of operating and maintaining the Bloomfield Township water & sewer system - FIXED
The cost of sewage treatment by EFSDS - FIXED
The debt service on the bonds sold by the township - FIXED
Given the above cost structure, the township then has two options when it comes to setting its rates:
Pass along variable costs as variable based on usage, and fixed costs as fixed, equally for all customers; or,
Convert fixed costs to variable and pass along all costs as variable.
So which does the township use?
Well, a third, a hybrid, actually. The township passes along all of the fixed debt costs equally to customers (some commercial customers pay a little more of the debt, depending on their use) and it passes along 80% of the operations and maintenance costs of the township’s systems as fixed, equally to customers (the “Ready to Serve” charges). The remaining 20% of operations and maintenance and the fixed cost of sewage treatment are allocated into the variable rates using a forecast for water volume so that heavier users will pay a greater share of the costs.
Here’s how it works:
First, the cost of water is obtained from SOCWA and the cost of sewage treatment from EFSDS. Then the township’s system budget is prepared, including all operations, maintenance, repairs, and improvements, including a component for shoring up our operating reserve.
Fiscal Year 2021 Water and Sewer Costs
Then the fixed charges are calculated, first debt, then “Ready-to-Serve”.
The Ready-to-Serve charge is calculated by taking the total O&M budget for the year, subtracting the so-called “non-rate revenue” (these are user fees earned when meters and taps are sold, and other services are performed by the township), and then multiplying by 80% and dividing by the number of customers on the system. A simplified version of the calculation is shown below:
The next calculations arrive at the per unit variable rates for water and sewer. In Bloomfield Township, 1 unit of water is equal to 1,000 gallons. Note that some municipalities price their water in units of cubic feet, so please be cautious if you are trying to compare rates with other communities.
The variable water rate relies on two assumptions. The first is how much water the township will purchase from SOCWA, which for FY21 we assumed to be 225,000 MCF (thousand cubic feet). The second assumption is how much water the township will sell to its customers, which for FY21 we assumed to be 1.6 million units (1,000 gallons). Shouldn’t those two numbers be the same? Well there is some water used by the system itself, in leaky pipes, water main breaks, fire hydrants, etc. Historically the township is able to keep its “water loss” below 5%, such that 95% of water purchased by the township from SOCWA is resold to customers.
Based on those assumptions, the variable cost of water can be calculated as $9.4 million in expense divided by 1.6 million units sold, or $5.86 per unit.
FY21 Water Rate Calculation ($ in millions, except per unit amount)
The sewer variable rate is calculated much the same way, except that it is calculated based on the volume of water sold to sewer customers. Since more than 20% of the township are still using septic systems and do not connect to our sewer system, there is much less water sold to sewer customers. Specifically, there are 2,200 more water customers than sewer customers. The FY21 estimate for sales of water to sewer customers is 1.1 million units.
Based on these assumptions, the variable cost of sewer can be calculated as $11 million in expense divided by 1.1 million units sold, or $9.56 per unit.
FY21 Sewer Rate Calculation ($ in millions, except per unit amount)
So for FY21, the water and sewer rates are as follows:
Using the assumptions embedded in the rates (as described above) here is what the distribution of total cost looks like. You’ll note that the external costs to the system (SOCWA and EFSDS) make up 56% of the total cost structure, with township operations and maintenance only accounting for 26%.
Bloomfield Township Water & Sewer Cost Distribution
Question 2. What is driving the increases in the water and sewer rates?
The biggest driver of the cost increases over the last few years has been the costs from the regional service providers. For example, the sewage treatment costs from EFSDS have increased 43% over the last 4 fiscal years, and the SOCWA water cost has gone up a little over 5% in the same period. From a longer perspective, the cost of water from SOCWA has increased 25% over the last 10 years. Our debt service has increased as well due to the timing of the principal and interest payments, and the sale of bonds for our capital improvement projects and regional infrastructure improvements. We are also spending more on contracted repairs and maintenance as we have reduced our in-house staff to keep costs down. Finally, our labor costs have been affected by the same increase in pension and OPEB costs as the rest of the township’s operations.
Another factor I have yet to mention is the impact of declining water usage on the rates. As the following chart shows, water usage in the township (actual usage in the blue bars) has been trending down over the past several years (the orange line). Since we face a cost structure that is mostly fixed, when water usage declines those fixed costs are divided by fewer units resulting in higher rates needed to cover the fixed costs. The decline in water usage is a combination of more efficient appliances and household practices, along with an increase in the number of “wet” years, years in which actual rainfall exceeds the average. In “wet” years, there is more rain and therefore less need for irrigation that draws on the township’s water supply. In fact, the 12-months ending October 31, 2019 were the wettest on record in 119 years. [Note 1]
The combination of rising fixed costs and declining water consumption are leading to significant increases in the water and sewer rates.
There have been many articles written on the rising cost of water facing this region. Here are two:
https://www.freep.com/story/news/local/2016/03/01/water-rate-increases/81166408/
Question 3. The “Ready-to-Serve” charges are not fair to low water users and snowbirds. Why does the township make the rates this way?
The “Ready-to-Serve” charges are how the township passes along much of its fixed cost structure. Every user has the water waiting at their tap whether they use 1 unit or 100, and the sewer connection to take away the wastewater. There is a large fixed cost to provide a “ready to serve” product.
There is definitely a balance that needs to get struck between charging rates that are more variable, i.e. where the heavier system users will shoulder more of the cost, and charging more flat rates that will ensure the township covers its fixed costs. To convert the fixed costs to variable costs an assumption has to be made as to volume sold. If the assumption turns out to be too high, the township will not collect enough revenue to cover its fixed costs. If water sales actually exceed the assumption, then the township will collect more than the fixed costs. The logic behind the RTS charges is that these charges mitigate the risk that the township does not collect enough revenue to cover its fixed costs.
Think of it this way. Suppose you are going to operate a taxi service where you are going to charge your riders by the mile that you drive them. How will you determine how much per mile to charge, especially when your two largest expenses are your car payment and insurance (fixed costs)? Your other big expense would be gas, which would vary based on how much you drive. If you expect that you will drive 1,000 miles in the month, you will divide your car payment and insurance by 1,000 to get a per-mile cost, then add gas per mile, then a mark-up for your time. But what if you have a slow month and only drive 800 miles? You likely won’t earn enough to pay your car payment and insurance. This is the conundrum facing the township as we have to determine how to set the water and sewer rates.
I am personally in favor of tweaking the current methodology so that less of the burden is on the infrequent user and more of it is on the heavy user. I plan to work on that in the coming year.
Question 4. How do our water and sewer rates compare to other communities?
Total water and sewer cost, monthly average, assuming 120 units of water purchased per year. Figures are for most recent year.
Bloomfield Township is on the higher side of regional communities in terms of water and sewer costs. You’ll note that the most expensive communities are also some of the older communities in Oakland County. In addition, many of the communities have been using their reserves to absorb the cost increases. Other communities have minimum bill amounts, Bloomfield Hills for instance. So at 120 units per year (30 per quarter, which is the average of township billed water usage) those minimums may not be meaningful, but at lower amounts they may become more relevant.
Some other relevant facts about this chart:
Beverly Hills, Birmingham, Huntington Woods, Royal Oak, and Southfield are “members” of SOCWA, not customers like Bloomfield Township and Bloomfield Hills. Their water cost is 15-20% lower as a result. SOCWA has not “opened the books” and let us in as a member. However if we were to become a member there would be a large up-front cost to “buy” into the system.
Oak Park, West Bloomfield and Farmington Hills are all direct customers of GLWA. Farmington Hills also has a large water storage system that it uses to reduce wholesale costs.
Waterford operates a community well system; this has a huge impact on their water cost.
Question 5. What is the water & sewer lawsuit all about? Why won’t the township just settle it?
Given that this litigation is pending in the Michigan Court of Appeals, there is little I can say about it. However, the case was filed as a class-action by a law firm which has been going around the state suing municipalities about their water and sewer rates. Many cities have settled with them for millions, and most (if not all) municipalities who went to trial ended up prevailing. We received a mixed judgment in the Oakland County Circuit Court (we won on some issues, lost on others) but both sides have appealed and are waiting on a date for oral arguments. I should note that the Michigan Municipal League and Michigan Townships Association have both filed amicus briefs with the appeals court on our behalf, stating that our methodology for rate setting is rooted in decades of precedent. In terms of settlement, the only offer presented to the Board during my tenure was completely unreasonable, especially in light of the fact that our attorneys are very confident about the likelihood of success on appeal.
For a more detailed discussion on the water and sewer rates, please see the Board Packet from the April 13, 2020 meeting, available from Documents-on-Demand here.