City Council, in September, 2018 adopted a change to water and sewer utility billing structures, and simultaneously adopted a policy to annually adjust rates by an amount equal to the annual change in inflation, as measured by a construction industry standard from the Engineering News-Record.  The ENR's inflation measurement can differ from other inflation measures, such as the Bureau of Labor Statistics' Consumer Price Index, because it looks at costs specific to construction, such as steel, lumber, general labor, etc.

The intention of the annual adjustment was to avoid future sudden large changes for customers by ensuring that rates always keep pace with costs.  This made good sense in late 2018, due to the incredibly long run of very low and very stable inflation in the United States.  From 2011 through 2020, the ENR's inflation index averaged just 2.65%, and only eclipsed 3% two times.

Without getting too in to details, suffice to say that the ENR's Construction Cost Index is experiencing much higher than normal growth in late 2021, similar to what is being reported about generalized consumer inflation by the popular media.  A look at the CCI in November showed an alarming year-on-year inflation rate of 9.22%.  Based on that potential, coupled with direction from the US Federal Reserve that long-run inflation would eventually return more closely to their annual target of 2%, City Staff recommended to the Public Infrastructure Committee that Council consider a slight change to the annual utility rate adjustment by making the annual adjustment based on a 3-year average of the CCI.  The members of the PIC generally agreed with the concept of annual adjustment averaging as a way of protecting the customers from sudden increases, while ensuring the utility keeps pace with inflation long-term.

Due to a typographical error by the ENR, the November CCI has since been revised down to 7.6%, which was good to see.  Meanwhile, the Year-to-Year change in the ENR's CCI for December, 2021 has been published as 7.35%.  Although this is marginally lower than what the ENR's reading had originally shown in November, it is still more than three times higher than 2020, and more than four times higher than 2019 when the CCI inflation was just 1.74%.

Based on the direction from the Public Infrastructure Committee, Staff still recommends proceeding with changing the annual inflation adjustment to a model that incorporates a 3-year average of the CCI.  As a result, the enclosed rate adjustment resolution proposes a water and sewer utility rate increase for 2022 of 3.75% which is an average of the previous three years of inflation, rather than the 7.35% shown in the CCI for 2021 on it's own.

Adoption of the proposed rate adjustment of 3.75% is projected to increase utility fund revenue by $344,595 over the next year.

Implementation of a 7.35% adjustment would potentially increase utility fund revenue by up to $675,407.  It is important to note that this is a potential figure, as there would likely be a curtailment of water consumption as a result of a relatively rapid price increase.

Therefore, adoption of the 3.75% rate adjustment would, in it's first year, reduce the purchasing power of the Utility Fund by $330,812.

However, by implementing the 3-year averaging concept moving forward, the Utility Fund would largely be held harmless from loss of purchasing power by making-up in future years.  Additionally, the Utility Fund is now in a position where a larger amount of it's annual expenses are for large capital replacement projects.  Therefore, the Utility Fund is capable of absorbing this short-term loss of purchasing power by shifting some projects around.

1.  Approve the Resolution as Presented.

2.  Recommend adjustments.

3.  Reject the Resolution.