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May 21,2004 Economic and Engineering Services Inc. Amendment No. 2 to Agreement for Professional Engineering Services Water Conservation Plan City of Moscow, Idaho Work Order No. 2-03-354 Economic and Engineering Services Inc. ("EES") and the City of Moscow, Idaho ("Client") entered into an Agreement for Professional Engineering Services executed on November 13, 2003 ("Agreement"). This Amendment to the Agreement is entered into by and between EES and Client. Section I of the Agreement (Scope of Work) is hereby amended as follows: • A new task is added to the scope of work: Task 11, Water, Sewer and Storm Water Rate Study. Attachment A (Scope of Services and Fees) describes this task in detail. (The attachment identifies Tasks 1 - 8, which will be considered Subtasks of T ask 11 Section 11-B of the Agreement (Fees and Conditions for Engineering Services) is hereby amended as follows: • The not-to-exceed fee for the project is increased by $77,054 to allow for completion of Task 11. With this addition, the total project budget will be $109,554. • Task 11 will be completed following the time schedule shown in Attachment A. This schedule assumes that the City can readily provide the necessary data and project meetings between City staff and EES can be scheduled in an expedited manner. By signing below, EES and Client hereby agree to this Amendment. Economic and Engineering Services Inc . By: '=ttfi Date: --tiDlf John M. Maxwell Vice President City of Moscow . ,4z&£il oat.Y Printed NameD""'/ d Title: ,04 2004-43 ---PAGE BREAK--- Introduction Economic and Engineering Services, Inc. (EES) proposes to provide a comprehensive water, sewer, and storm water rate study to the City of Moscow (City). A comprehensive rate study provides the basis for evaluating each utility's financial requirements, while establishing rates that are equitable and cost-based to the City's customers. Provided below is a detailed discussion of the proposed scope of services to conduct this study for the City. Overview of a Comprehensive Rate Study A comprehensive rate study is generally comprised of three interrelated analyses: the development of revenue requirements to determine adequate funding levels, a cost of service study designed to understand the cost differences associated with serving various types of customers, and a rate design analysis that establishes a cost-basis for setting fixed and variable rates. Provided below in Table I is a brief overview of the rate study process. Revenue Requirement Analysis Cost of Service Analysis Rate Design Analysis Compares the revenue of each utility to the expenses to determine the overall adjustment to rates. Allocates the total revenue requirements to the various customer classes of service in a "fair and equitable'' manner Design rates to yield the revenue requirements and meet the goals and objectives of the City. While Table I provides an overview of the typical components of a comprehensive water, sewer, and storm water rate study, an important aspect of this study is incorporating and "tailoring" those analytical elements into an overall scope of services that will provide the work products being requested by the City. Provided below is detailed discussion of how this basic analytical framework will be tailored to meet the City's needs. Scope of Services and Fees City of Moscow 1 ---PAGE BREAK--- Detailed Description of Proposed Scope of Services EES has attempted to develop a detailed scope of services that meets the specific goals and objectives of the City. In developing the proposed scope of services, two items should be noted. First, it is assumed that each of the analyses (water, sewer, and storm water) will be conducted simultaneously. Second, is that the scope of services to conduct the water, sewer and storm water analyses are assumed to be identical, except where noted. Task 1-lnitial Kick-Off Meeting (Project Meeting) Task Objective: Bring the Consultant, City management and personnel together. at the start of the project, to assure that both parties have a mutual understanding of the project schedule and the goals. objectives, issues and concerns that will be addressed in the study. The initial project meeting is often critical to the total success of the engagement. At this meeting, both the consultant project team and City project team will meet to define the project schedule, purpose, goals and issues to be addressed. The project approach and methodology will also be reviewed to ensure the approach used will meet the City's needs. The initial meeting assures that all participants have a clear understanding of "The initial project meeting is often critical to the total success of the engagement." the project deliverables, level of effort required by all parties, and time commitment to complete the project. A discussion will be held regarding the data and information that will be required for the study. This initial project meeting is generally scheduled as a half day session. Work Product Deliverables as a Result of Task 1: Ill Defined project schedule, purpose, goals and issues to address in the study. Ill Discuss approach and methodolO!,>y to be used for the study. II Face-to-face meeting to get the study off to a positive start. Task 2-Data Collection Task Objective: Provide a written data request detailing the data required to complete the study. The initial written data request details the data and information required to conduct the study. A written data request will be provided to the City prior to the initial kick-off meeting so that it can be discussed at the meeting and any problem areas quickly resolved. The data and information requested for this study should be, for the most part, readily available information (e.g. financial, statistical, customer, etc.). The area that most time is required by the City is gathering customer billing information for a 12 month period. Work Product Deliverables as a Result of Task 2: Ill An initial written data request to the City. II Identification of any data constraints. Task 3-Revenue Requirement Analysis Task Objective: Using a generally-accepted rate setting methodology. develop the City's water. sewer. and storm water revenue requirements for a projected jive-year period while ensuring adequatefunds for operating and capital needs. The development of the water, sewer, and storm water revenue requirement analyses is the first major analytical portion of the comprehensive rate study process. This portion of the study lflee5 Scope of Services and Fees City of Moscow 2 doc ---PAGE BREAK--- entails reviewing, for each utility, the various sources of funds (revenues) and comparing them to the applications of funds (expenses) for the utility. This task considers the prudent and proper funding for O&M and capital expenditures for each utility, and determines the need for any rate adjustments over the time period selected. A more detailed discussion of the various steps involved in developing the City's revenue requirements for each utility is provided below. STEP 1 - SELECTION OF A TEST PERIOD - The first step in the development of the revenue requirements is the selection of a "test period". A "test period" refers to a time frame of reference for the accumulation of revenues, expenses and consumption data. In this case, a five year projected time period is proposed (e.g. 2005 2009). By reviewing costs over this extended time frame, the City can determine if any major rate impacts are on the horizon and potentially take steps today to help minimize future impacts (e.g. rate adjustment transition, accumulation of capital reserves, etc.). STEP 2-METHOD OF ACCUMULATING COSTS- Once the "test period" has been determined, the next decision is to determine the basis or method of accumulating costs. There are two choices for accumulating costs for revenue requirement/financial planning purposes; the "cash" or "utility/accrual" basis. Table 2 provides a simple comparison between these two "generally accepted" methodologies. Utility/Accrual Basis O&M Expense Taxes or Transfer Payments + Annual Depreciation Expense c Return on Rate Base (Investment) Revenue Requirement Cash Basis + O&M Expense + Taxes or Transfer Payments + Capital Projects Financed with Rate Revenues Depree. Exp.) + Debt Service (P+l) Revenue Requirement In practice, the "cash" basis approach is most commonly used by public (municipal) utilities for determining and setting their revenue requirements since this closely follows their budgeting process. This is the methodology EES would recommend to establish revenue requirements for the City. STEP 3 - ACCUMULATION OF REVENUES AND EXPENSES- Once the test period and method of accumulating costs has been determined, EES in conjunction with City management and staff, will develop the test period revenue requirements for each utility. Revenue requirements are composed of two major types of costs; operational and capital expenses. The operational costs are generally projected from historical or budgeted costs, using assumed escalation factors, and adjusted for any known changes in operations (e.g. additional personnel, growth/expansion, etc.). While the projection of the operational costs is fairly straightforward, the capital cost projections are generally the focus of the analysis, and require more thought and planning. J-U-B will ensure that appropriate data from the University of Idaho sewer cost apportionment study is included where applicable. Special emphasis will be placed on developing the revenue requirements for a stand-alone storm water utility. All current and future operating costs and regulatory requirements of the storm water utility should be included plus a share of the administrative overhead costs. The capital needs of the utility will be r1lee5 Scope of Services and Fees City of Moscow 3 ---PAGE BREAK--- addressed in the capital analysis completed for each utility. J-U-8 based on its knowledge of sanitary sewer, storm water and water systems, previous planning completed for the City and interviews with City staff will prepare capital plans for each of the utilities for the 2005 - 2009 time period. These capital plans will be used in the capital section of the rate study. In addition, depreciation schedules for each utility will be provided by J-U-8. The depreciation schedules will be used as a beginning point when establishing the appropriate level of capital that should be funded through rate revenue. In the capital planning process, consideration must be given to maximizing the capital improvements (expenditures) for the system, while minimizing rates to its customers. Table 3 provides an overview of the general approach that is used to develop a capital funding plan for the revenue requirement analysis. + Total Capital Projects Renewal and Replacement Capital Projects Legally Mandated Capital Projects System Growth and Expansion Capital Projects Outside Funding Sources Capital Reserves Grants Low-Interest Loans (State and/or Federal) System Development Charges (SDCs)/(Contributed Capital) Short-Term Borrowing Borrowed Funds/Long Terrn Debt (e.g. Revenue Bond) Capital Projects Financed with Rate Revenues Depree. Exp.) The basic framework shown above is developed on a year-by-year basis for each of the projected five years of the water, sewer, and storm water revenue requirement analysis. In summary form, the general approach is to list all water, sewer, and storm water capital projects in each year, and then determine the various outside funding sources for each of the projects. These outside funding sources may be low-interest loans, grants, customer capital contributions, system development charges, etc. The balance of projects not funded by the available sources of funds must be financed from a combination of long-term debt and rates. It is the balancing of the use of long-term debt to the impact upon rates, which is critical to the analysis. The result of the revenue requirement analysis is a multi-year financing plan that meets the City's goals and objectives for each utility, while attempting to minimize rates and costs over time. Work Product Deliverables as a Result of Task 3: IIII A projected water, sewer, and storm water revenue requirement analysis for a projected 5-year period that considers the necessary operating and capital needs of each utility. IIII A capital improvement plan for the 2005 - 2009, for each utility. II Depreciation schedules for each of the utilities. IIII A capital financing plan within the revenue requirement analysis, which attempts to maximize capital expenditures, while minimizing the impacts to customers over time. Scope of Services and Fees City of Moscow 4 ---PAGE BREAK--- !Iii If needed, a transition plan to "phase in" any needed rate adjustments. !Iii Recommendations regarding key financial indicators (debt service coverage, capital replacement, reserve levels, etc.). Task 4-Cost of Service Analysis Task Objective: Develop an average embedded cost of service study to equitab(y allocate the revenue requirements of the water. sewer, and storm water systems to the customers served by the City. Given the results of the revenue requirements, the City's water, sewer, and storm water costs will be allocated to the various customer classes of service using an average embedded cost of service methodology. In simplified terms, a cost of service study attempts to equitably allocate the revenue requirements of each utility between the various customer classes of service (e.g. residential, commercial, etc.). A brief discussion of the major steps associated with a water, sewer, and storm water cost of service analysis is provided below. STEP 1 - SELECTION OF TEST PERIOD The first step of a cost of service is to select a time period for the allocation of costs. This is similar to the revenue requirement time period selection process noted above. A cost of service analysis typically reviews a I to 2 year period, or the period over which water, sewer, and storm water rates will ultimately be set. In the City's case, allocating tbe year 2005 revenue requirements for each utility for cost of service purposes would appear to be appropriate. STEP2- FUNC110NALIZATION AND CLASSIFICATION OF EXPENSES- The next step in the cost of service analysis is to functionalize the data. Functionalization refers to the arrangement of cost data into its basic cost categories (e.g. for the water utility, source of supply/production, treatment, transmission, distribution, etc.). This task is simplified greatly through the City's use of a uniform system of accounts. Given functionalized costs, the costs are then classified to their various cost components. For the water utility, classification involves determining whether each specific cost or account item was incurred to meet a consumer's capacity, commodity, fire protection or customer related need. In contrast, for the sewer utility, classification involves determining whether each specific cost or account item was incurred to meet a consumer's volume, strength or customer related need. For the storm water utility, cost allocation is a much simpler process. Total costs are divided by total billing units to create a dollar per unit storm water rate. The billing units are typically based on lot size and the impervious surface area of the lot. Cost based rates charge the same cost per unit, with the billed number of units being adjusted for the customer's lot size and impervious area. While the basic cost components noted above for each utility are the cornerstone to the analysis, they are by no means the only cost components to be utilized for each of the studies. A thorough review of the various types of costs that the City incurs for each utility will be undertaken and specific cost classifiers developed. Classification will be based upon generally accepted cost of service techniques. STEP 3 -DETERMINATION OF CLASSES OF SERVICE- Development of the cost of service for each utility begins with determining the classes of service that will be used for purposes of establishing cost allocations and rates. The process of establishing classes of service is to group l{(ee5 Scope of Services and Fees City of Moscow 5 ---PAGE BREAK--- customers into homogeneous groups. That is, customers with similar usage and/or facility requirements. EES will review the data and information that is available for each utility on the various customer classes of service to determine final classes of service for cost allocation purposes. STEP 4-ALLOCATlON OF EXPENSES- The next analytical process involved in each of the cost of service analyses is the allocation of the classified rate base and expenses to each of the customer classes of service. Once the classes of service have been determined, the process of developing allocation factors is undertaken. In developing the allocation factors, EES will develop factors that are "fair and equitable" to all customers, and which rely upon City specific data where available. For the water utility, the allocation factors typically developed are commodity, capacity, fire protection, customer and revenue related. J-U-B will review water meter records for residential, commercial and industrial users to calculate flow by class of service and peaking factors. The sewer utility allocation factors are typically volume, strength (BOD/SS), customer and revenue related. J-U-B will assist in developing the base residential equivalent for calculating sewer contribution. In addition, J-U-B will collect samples from selected commercial and industrial users to determine equivalency loadings to residential waste and strength. On the storm water utility, J-U-B will also assist determine an appropriate equivalent residential unit based on impervious surface area and City specific lot sizes. STEP 5 - SUMMARY OF THE COST OF SERVICE - Given the development of all the allocation factors, the final step is to allocate the expenses to each class of service. From this process, a summary page of the cost of service study for each utility is provided. The summary page for the cost of service study compares the difference between the current level of rate revenues received from each class of service, and the allocated cost of service for each customer class. The cost of service will also provide average unit costs, or cost-based water, sewer, and storm water rates, which are important to the development of final rate designs. Average unit costs provide the City with an understanding of the cost/rate relationship between fixed and variable costs. Work Product Deliverables as a Result of Task 4: Ill Review of the current customer classes of service for the water and sewer utilities. Ill Identify a cost per equivalent residential unit for the storm water utility. Ill A "fair and equitable" allocation of the revenue requirements to the various classes of service for the City's water, sewer, and new storm water systems. Ill A summary of the average unit costs (cost based rates) for the various customer classes of service for the water, sewer, and storm water utilities. Task 5-Rate Design Analysis Task Objective: Utilize the cost information developed as a part of the previous tasks and develop water, sewer, and storm water rate design options for possible adoption by the City Council. A starting point for the water, sewer, and storm water rate design process is understanding the rate design goals and objectives the City is striving for in this study. These objectives may include ease of administration, simplicity, revenue stahility, conservation, etc. Understanding the Scope of Services and Fees City of Moscow 6 ---PAGE BREAK--- City's rate design objectives will assist EES in the development of any needed water, sewer, and storm water design alternatives. In designing the water, sewer, and storm water rate options for the City, the cost of service information and average unit cost information for each utility will be utilized as a starting point. As a part of this task, the City's present rate designs for each utility will be reviewed to ensure that they conform to contemporary rate-setting goals and objectives. In addition, the information developed as part of the interim water rate design process will be used to minimize the level of effort required on the water conservation rate design alternatives. There are a variety of rate structures that are available for collecting equitable and cost based storm water rates. However, when first establishing a storm water utility, many Cities find it beneficial to first establish the "concept" of a storm water utility and associated services to their customers. Therefore, many storm water utilities begin hy applying a flat $/month/account fee. Although this rate structure is not the most equitable, it is successful at introducing the concept of paying for storm drainage services and beginning to collect the necessary revenue to support the utility. Once the basic concept of storm water rates has been in place, the City can then come back, at a future time, and begin to establish rates on a more equitable basis. Storm water nm-off is generally a function of Jot size and impervious area (e.g. parking lots, buildings, sidewalks, etc.). To establish a rate based on impervious area, new data may need to be collected. The new data is needed for commercial accounts in order to calculate the total area of a customer and the impervious area. This type of data is readily available from current aerial photography or may he most cost-effectively collected by visual site surveys, depending on the number of customer being reviewed. Residential parcels generally do not require site specific data since they are typically charged the same rate since they have similar impervious areas. EES can assist the City in determining what data and billing database requirements are needed in order to consider a rate based on impervious area. The final rate alternatives will depend on the goals, objectives and billing capabilities of the City. EES will review the rate objectives of the City and provide two rate alternatives for each utility that will meet those objectives. For each rate design developed, a bill comparison will be provided that shows a comparison between the present bill and the proposed bill at various levels of usage. Bill comparisons are useful in assessing the potential impacts to a wide variety of customers. Work Product Deliverables as a Result of Task 5: II Review of the City's current water and sewer rates and development of two rate design alternatives II Development of new storm water rates II Bill comparisons for the rate design alternatives developed. Task 6-Meetings/Workshops/Public Presentations Task Objective: Provide effective public presentations of the findings, results and recommendations of the study. EES would suggest up to four meetings with the City Council and the public. These meetings would be as follows: Scope of Services and Fees City of Moscow 7 ---PAGE BREAK--- • Workshop to Review the Draft Revenue Requirement Analysis • Workshop to Review the Draft Cost of Service Analysis • Workshop to Review the Draft Rate Designs • Public Hearing (City Council Meeting) on the Proposed Rates It is anticipated that these meetings, with the exception of the public hearing will be a workshop format. The above meetings are the anticipated number needed for this study. Any additional meetings required will be provided on a time and materials basis. Throughout this project, EES will schedule, as appropriate, project meetings with the City staff to keep them abreast of the progress of the study and to assure that the assumptions and methodology used within the study are consistent with the City's needs. Work Product Deliverables as a Result of Task 6: II Up to four ( 4) workshops/public presentations with the City Council during the rate study process to gain policy direction and present the results to the public. Task 7-Written Report Task Objective: Provide a well-written report to summarize the findings, conclusions and recommendations of the rate study. Upon completion of the rate analysis, EES will develop a draft written report of the rate study. The written report is intended to be comprehensive in nature and document all of the activities undertaken as a part of the project, along with our findings, conclusions, and recommendations. Within all of our reports, EES provides technical appendices of all the technical analyses undertaken. EES will provide five copies of the draft final report to the City for their review and comment. Any comments, suggestions or corrections from the City concerning the draft final report will be incorporated into the final report. Fifteen (15) copies of the final report will be provided to the City. Work Product Deliverables as a Result of Task 7: 1111 Five copies of the draft report and fifteen (15) copies of the final report. Task 8-Computer Models Task ObJective: Provide a copy of all models developed as a part of this study. The financial/rate models developed for the City will be provided at the end of the study. The model will be developed using the spreadsheet program of the City's choice (e.g. Excel, Lotus, etc.). Work Product Deliverables as a Result of Task 8: 1111 A copy of the computer spreadsheet model used to develop the City's study. This concludes the discussion of the proposed scope of services for the City. EES is willing to modify our approach to meet the City's specific needs. dlees Scope of Services and Fees City of Moscow 8 ---PAGE BREAK--- Project Personnel Project management and analysis for this study will be provided primarily by the following individuals. The project manager has recently completed technical analysis on the interim water rate design and presented the results to the City CounciL Provided below is a brief overview of the project team members. Angie Sanchez Vimoche -Angie will serve as project manager and task lead. In this role, she will manage the day-to-day portions of the project and present all findings at scheduled meetings/workshops. Angie's expertise is financial planning, cost of service and rate design. Since joining EES over ten years ago, she has gained extensive experience and expertise by working on and managing numerous rate studies. Angie has been the Project Manager for other rate studies conducted by EES, such as the City of Mountlake Terrace, City of Sequim, City of Port Angeles, North Perry Avenue Water District, Southwest Suburban Sewer District and the Alderwood Water and Wastewater District. In addition to her work with clients, Angie manages the program group for financial planning and rates within EES. She also serves on the National Rates and Charges Subcommittee for A WW A, as well as the financial management committee for A WW A-PNWS. Tracey Benson, Rate A11alyst - Tracey will provide technical analysis and modeling support for this study. Tracey has extensive experience in accounting and financial planning. Tracey is currently working on rate studies for the Cities of Sandpoint, ID, Anacortes, W A and recently completed a rate study for the City of Santa Cruz, CA. Kevin Gardes P.E. -Kevin is a project Manager for J-U-8. He has worked primarily in the area of municipal engineering. Kevin's responsibilities include preliminary engineering and planning, environmental documentation, evaluation of water and wastewater systems, solid waste, disposal, streets/road design and construction management. Kevin will provide his engineering expertise and knowledge of the local area to the project. Kevin will develop the capital improvement plans, depreciation schedules and assist in the development of the allocation factors that will be used in the rate studies for each of the utilities. Kevin has and continues to have a successful working relationship with the City. Jim Kimball, P.E/L.S. - Jim spent his first seven years as a professional engineer with the Idaho Department of Health and Welfare evaluating compliance with environmental and public health regulations. He also assisted with operator training and evaluating deficiencies in water and wastewater systems that did not meet regulations. In private consulting he has been Project Engineer for many of the wastewater projects in the Northwest, including Spokane. Kimball Engineering, which was started by Mr. Kimball in 1984, recently merged with J-U-B. Jim has 35 years experience in water and wastewater planning, including approximately 12 years of experience with the Moscow wastewater system. Mr. Kimball prepared the most recent wastewater facilities plan for the City, and has been the project manager on the last three phased upgrades at the Moscow wastewater treatment plant. Jim also was the project manager on the City's sanitary sewer system evaluation and computer modeling study. Scope of Services and Fees City of Moscow 9 ---PAGE BREAK--- Estimated Time Schedule A rate study of this complexity generally requires 20 to 24 weeks to complete, depending upon a number of factors. These factors include the amount of time required by the City to collect the necessary data, the ability to schedule meetings with City staff in a timely manner and, most importantly, receive policy direction from the City's management and/or City Council for the study. Provided below in Figure I is an estimated time schedule for the project. Task Description l Initial Project Meeting 2 Data Collection 3 Rev. Requirement Analysis 4 Cost of Service Analysis 5 Rate Design Analysis 6 Written Reports 7 Public Presentations • 8 Models EES Hourly Billing Rates EES utilizes the following hourly billing rates. These rates were effective as of January I, 2004. Title Principal!V Associate Analyst Financial Manager Sr. Financial Analyst Project Analyst Financial Analyst Associate Engineer Engineering Manager Sr. Engineer Project Engineer Engineer Sr. VVord Processor VV ord Processor lllees Scope of Services and Fees City of Moscow Grade 7 6 5 4 2/3 7 6 5 4 213 Hourly Range Within a Grade Minimum to Maximum $144.00/hr $165.00/hr $118.00/hr $160.00/hr 105.00/hr 145.00/hr 95.00/hr 125.00/hr 80.00/hr 105.00/hr 75.00/hr 95.00/hr $118.00/hr $160.00/hr 105.00/hr 145.00/hr 95.00/hr 125.00/hr 80.00;hr 105.00/hr 75.00/hr 95.00/hr $39.00/hr $55.00/hr 31.00/hr 52.00/hr 10 ---PAGE BREAK--- Title PrincipalN. P. Project Manager Support Staff: Engineer ElT/CADD Clerical Estimated Fees Rate $125.00/hr 109.00/hr $84.00/hr 60.00/hr 45.00/hr Based upon the current hourly billing rates and the estimated labor needed to conduct the water, sewer, and storm water rate, EES has developed fee estimates for the City's project. Labor: Task 1: Initial Project Meeting Task 2: Data Collection Task 3: Revenue Requirement Analysis Task 4: Cost of Service Analysis Task 5: Rate Design Analysis Task 6: Public Presentations Task 7: Written Report Task 8: Computer Rate Models Grand Total Labor Expe11ses: Water $1,000 150 9,050 9,895 4,500 2,000 2,000 N/C $28.595 Sewer $1,000 150 8,295 9,035 4,000 2,000 2,000 N/C $26,480 Airline ($150RT 2-initial proj. meeting, I · 4 Council workshops) Car ($50/day 5 meetings/workshops) Hotel ($79RT 2-initial proj. meeting, I- 4 Council workshops) Misc. (phone, copies - report, fax) Total Expenses Grand Total Water, Sewer, and Storm water Rate Study Storm Total $500 $2,500 100 400 7,625 24,970 4,130 23,060 3,500 12,000 1,000 5,000 1,500 5,500 N/C 0 $18,355 $73,430 900 250 474 ___lj)OO $3,624 $17.054 The above fee estimate is based upon the scope of services presented. Should the City request any additional services under this contract, the services will be provided at the hourly billing rates stated above. All portions of this proposal can be expanded or reduced as mutually agreed upon in writing by the City and EES. Scope of Services and Fees City of Moscow 1 1