Seattle Public Utilities issues updated strategic plan, new proposed rates

Tomorrow morning, Seattle Public Utilities will appear in front of the City Council’s Transportation and Utilities Committee to present its updated six-year strategic plan and an accompanying six-year plan for the rates it will be charging its customers. The strategic plan summarizes the highlights and challenges for the public utility company, including the factors leading to the new proposed rates.

SPU’s six-year strategic plan is updated on a regular three-year cycle, so while it looks out several years generally speaking no version of it is particularly revolutionary. That said, over time one can certainly see 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: 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. It 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 transfer stations.

SPU and its sister organization, Seattle City Light, share a billing and customer-service system, including a call center; each contribute 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, its 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 on the flip side, the increase would have been much worse, except for three factors:

  1. A decrease in SPU’s cost of borrowing. Normally SPU borrows money through issuing bonds, which at the moment are running at an interest rate of 4.5 to 5%. However, the utility has taken advantage of some federal and state loan opportunities to borrow money at a much lower rate. Topping the list is a $192 million federal loan for the Ship Canal Water Quality Project, at a rate of 1.01%, and a $66 million capital projects loan from a revolving state fund at 1.2%. Together these are expected to save SPU tens of millions of dollars, and that savings flows through to customers.
  2. A change in assumptions about capital projects. SPU has updated its “accomplishment rate,” i.e. the percentage of its annual capital project work plan that is expected to actually get done. The rate is never 100%, no matter how efficient an organization is; there are delays for all sorts of reasons, from materials availability though inclement weather. A few years back SPU had budgeted based on an assumed accomplishment rate of 100%, which meant that in practice it never spent its full capital budget in any given year. After some pushing from Councilmember Herbold, SPU changed it to 97.5%, still a very conservative budgeting position. But beginning this year, after looking at its own performance as well as industry norms, it has revised its accomplishment rate down to 85%. In practice, it doesn’t change it capital projects plan, but it means that SPU only needs to budget for 85% of the cost of the entire plan. Over the six years of the proposed plan, this change is expected to reduce SPU’s expenses by over $200 million.
  3. SPU recently renegotiated its contracts with its major solid waste service providers, obtaining lower rates. It expects that will save $5 million per year.

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.

SPU’s portion is, of course, passed through to its customers through higher drainage and wastewater rates. But it turns out that much of King County’s portion is as well, as it is raising the rates it charges SPU for wastewater treatment to compensate for the additional expense. King County is also notorious for causing whiplash with its rate changes, which is the biggest factor in why SPU’s drainage and wastewater rate increases are larger and more volatile — King County’s rate changes are passed through to SPU’s customers.

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 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.
    SPU is also experimenting with setting up a permanent RV pump-out station in the city, given that the nearest site is over 20 miles from Seattle. The RV pump-out program is budgeted at $200,000 per year — though that might grow.
    However, it must be pointed out that both the trash pickup and the RV mediation programs are tiny compared to the scale of the problems they are trying to address. In an interview yesterday, SPU CEO Mami Hara was unwilling to speak to whether the city would scale up the program further, calling it a policy issue for the Mayor’s Office to decide.
  • Affordability. Utility rate affordability is one of SPU’s major themes in its strategic report, and it has no lack of programs to address it: from the Utility Discount Program, to the Emergency Assistance Program, to payment plans, and a program to adjust your bill if a water leak causes it to spike. The Utility Discount Program, which City Light also participates in, has been touted as on ongoing success, though many still fret at the relatively low level of participation by eligible households.

    SPU has a goal of enrolling an additional 3,000 households in the program each year — though after a big surge in enrollments at the start of the pandemic, enrollment actually dropped a bit for reasons that aren’t entirely clear (it’s possible that individuals became re-employed and no longer qualified for the program, or perhaps they moved out of the city to find cheaper housing).

    While increasing enrollment in the Discount Program increases equity (people with less means pay less), it will cause a hit to SPU’s revenues, inevitably causing overall rates to increase to compensate. SPU also needs to deal with increasing delinquencies in payments, which as of last October were over $6.6 million — a big increase from 2019, but overall a tiny share of SPU’s total revenues.
  • Shifting to work-at-home. This comes up in several places in SPU’s strategic plan, from two angles. First, it needs to strategize about what it means for its own workforce, particularly the office workers. It is looking at the possibility of reducing its leased office space if more of its workers will choose to work from home at least part-time. But it also needs to think about what effect a larger demographic shift towards working from home means for its business. Traditionally its business has split 45% residential, 45% commercial, and 10% wholesale (to other neighboring cities). But 2020 changed that, with much of the city’s office space closed. But it isn’t simply a shift from commercial to residential; SPU also must consider how many of Seattle’s office workers commute in from outside the city — and so if they stop commuting in, that will increase residential utility service in other cities, but not as much in Seattle. Of course, there are many people also doing a “reverse commute”: working in Redmond or Bellevue, but living in Seattle. But that all makes the modeling very complicated: first, predicting how permanent the shift to working from home will be; and second, calculating the net change in people spending their workday in Seattle — whether it’s the commercial or residential areas.
  • Sustainability. SPU has no lack of sustainability initiatives, including its “Shape 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. Hara observes, though, that recycling alone will not be enough, one of the reasons that SPU is engaging with companies to try to reduce packaging materials in purchased products. 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.
  • Workforce management. SPU projects that 34% of its workforce will be eligible for retirement in the next three years — and that number will only grow with time. That means the utility needs to invest both in programs to retain its existing workforce as well as to train future generations of utility workers. With regard to retention, SPU plans to invest over $73 million in improving its workplace environment through facilities improvements over the next six years.
  • 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. Hara said that SPU is partnering with the University of Washington’s Climate Impacts Group to model the potential impacts of sea level rise.

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.

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