Philadelphia Water Department

FAQ About Our Rates Process

1. How are Water and Sewer Rates Set?

The rates are established by regulation. In 1992, the Water Department, in coordination with Community Legal Services (CLS) and City Council staff members, established the rate process regulations.
Selection of the hearing officer and public advocate

The rate process is modeled on the rate proceedings in place at the Public Utility Commission. The Mayor, City Council President and City Controller jointly appoint a Hearing Officer to oversee the rate setting process and a Public Advocate to challenge the necessity of a rate increase. Any affected member of the public can appeal the rate filing and become a party to the formal technical hearings. This process takes approximately one year. The department pays approximately $1 million per rate case to fund the Public Advocate and their experts, the Hearing Officer, an outside rate consultant and significant public advertising.
Hearing process

During the hearing process the Water Department discloses supporting documentation for the rate increase. The hearing officer and public advocate may examine and cross-examine the testimony of Water Department personnel and other City witnesses, experts testimony and testimony in opposition to the rates. The Hearing Officer is charged with managing both the technical hearing process and receiving testimony from the general public at scheduled public hearings. The Water Commissioner does not participate in the rate hearings.
Rate recommendation

At the conclusion of the hearings the PublicAdvocate,theWater Department and all other parties may file a briefs and reply briefs in support of their various positions.The Hearing Officer reviews all testimony and based on the record provides theWater Commissioner with a report and a recommended decision on the rates. The Water Commissioner in making a Final Determination must fully consider and give substantial weight to the Hearing Officers report. If the Commissioner disagrees with the report, reasons for that disagreement must be cited. The Commissioners Rate Determination can be appealed by any party to the Court of Common Pleas. The current water rate process provides for many checks and balances and for significant oversight by the public.
2. Why did the City Charter establish the current process?

During the first half of the twentieth century, the citys water and sewer infrastructure suffered as a result of inadequate revenues.The citys drinking water was well known for its poor quality and its rivers were essentially dead. As a result, the Home Rule City Charter in 1951 established a separate process to set water and sewer rates. The Charter, on page 81, goes on to explain why this power was granted:
The Water Department is to fix and regulate rates and charges for supplying water and sewage disposal services so that this function will not be subject to the political pressures that have been brought to bear upon Council when it has undertaken to perform this task. Rate-making for utility services has long been regarded as being primarily an administrative function subject to legislative standards and this section follows this practice. Council is to ordain the standards pursuant to which rates are to be fixed, a proper function of the legislative branch, and the Department is to fix rates within such standards, an appropriate function of the administrative branch. 3. When was the current process established and how does it work?

The 1951 Home Rule Charter established a process whereby City Council creates the standards for how theWater Department sets water and sewer rates. The Water Department sets the actual rates and charges to customers and must ensure that those rates and charges cover the operating expenses and debt service obligations. Any standards set by City Council must also be sufficient to allow the Water Department to cover these obligations. The Water Department-related revenues are placed in a separate Water Fund account. All charges to and from the Citys General Fund are based solely on actual costs, except for the excess interest earnings payment from the Sinking Fund Reserve which allows a transfer of interest earnings on the Water debt reserve account of up to a maximum of $4,994,000 annually.

Philadelphia Water Department

FAQ About Our Rates Process

4. What standards did City Council establish?

The standards established by City Council in the Philadelphia Code at Sections 13-101 and 13-201 provide further direction to Water Department.These sections establish basic standards of fairness and equity. Rates for each class (residential, commercial and industrial) of customer are based on the actual cost of service. There can be no cross-subsidies between classes of customers. There is no provision in the City Code regarding the "affordability" of water and sewer rates, except for the discounts provided to qualifying senior citizens and charities. All proposed changes in rates must be submitted to City Council thirty days in advance of a formal filing with the city Department of Records. Under the Water and Sewer General Bond Ordinance, the Water Department is not permitted to operate at a loss. To do so would result in a violation of the departments bond covenant.
5. How does City Council oversee the Water Departments annual budgets which form the basis of the departments

revenue requirements?

Council has direct authority to approve appropriations for both the Water Departments operating fund and the Water capital fund, including the Water Department share of these appropriations. All the costs included in the existing Water Department cost of service rates are based on these appropriations. Since all Water and Sewer rates are based on the actual cost of service, Council plays a pivotal part in the rate setting process. Council also approves the Water Departments five year financial plan on an annual basis, which is also reviewed and approved by PICA. Finally, Council provides specific authorization for each and every Water and Wastewater Revenue Bond issue for the financing of its Capital budget. The debt service from these issues makes up a significant portion of the water and sewer rates.
6. What effects could the proposed City Charter Change have on the Water Departments revenues and bond

coverage? The current process ensures that the revenue required to meet the departments operating and bond coverage needs are met to allow the department to continue to invest in its 6,000 mile water and sewer infrastructure, its water and wastewater operating facilities and to meet and do better than federal and state requirements for the delivery of safe and high quality drinking water and clean and beautiful rivers and streams. The maintenance and replacement of the departments systems should at best be held above a political process which caused the water and sewer systems decline in the first half of the Twentieth Century. In addition, as noted in the previous questions, City Council already plays a direct role in the departments operations in a way that ensures a strong checks and balances oversight is already in place. Additionally, the proposed amendment to the Charter would be in direct conflict with the 1993 General Bond Ordinance and the bond covenants or contract terms provided by the Ordinance. Nearly all of the Water and Sewer Bonds now in circulation were issued under the 1993 Ordinance. As a consequence, if the amendment were passed, the City would be in breach of its bond covenants allowing bondholders either to invalidate the Charter change or require immediate redemption of all the bonds. The invalidation of the Charter change would likely last for the term of the longest bonds, or about 30 years. If a redemption requirement were imposed on those bonds, the Water Fund would face very large transaction costs. Currently there are about $1.9 Billion in water and sewer bonds outstanding, and the transaction costs for refinancing could be over $50 Million, which would have a substantial effect upon rates. Also, the proposed Charter change will be perceived very negatively by the bond rating agencies as investors rely on the current structure provision that removes the departments rates from additional political exposure. For instance, the October 2011 FitchRatings rating report noted that one of the reasons the water and wastewater revenue bonds received an A+ rating was due to:
Sound management and stable operations: Consistent operating results, sound liquidity, and the ability of management to establish rates independent of city council approval offsets narrow debt service coverage levels.