LUCAN – Township of Lucan Biddulph council has adopted a draft financial plan for its water system and is expected to revisit the possibility of increasing water rates later this year.

The plan, prepared by engineering firm BM Ross, suggests annual five per cent water rate increases from 2012 to 2017 would result in a water reserve balance – excluding development charge reserves – of about $52,000.

Maintaining the township's water reserve balance of about $387,000 at the end of 2011 would require six annual increases of about 9.3 per cent, according to a memo to council from BM Ross engineer Stephen Burns.

Burns presented two draft plans to council at its Jan. 16 meeting – one that calls for a series of five per cent increases and one that calls for increases of 9.3 per cent.

Council adopted the plan that calls for five per cent increases, but would have to pass new water rates in a bylaw later this year.

According to Burns' memo, the Ministry of the Environment has set out detailed requirements for financial planning related to water works systems in the Safe Drinking Water Act.

Under the Act, financial plans for water works systems must be submitted within six months of the ministry issuing a first drinking water license.

Lucan Biddulph has a single water distribution system servicing Lucan and Granton, with treated water supplied by the Lake Huron Primary Water Supply System, according to the memo.

The system has 1,160 residential and commercial customers and 32 bulk water accounts.

It's estimated the number of residential customers is increasing at the rate of about 30 per year, the memo states.

According to Burns the province breaks down the full cost of providing water services into eight major categories including the depreciation of a system's physical assets.

Burns told council the value of Lucan Biddulph's water works is about $8.5 million, but it's depreciating every year, and the depreciation is considered an expense.
 
Other major categories include operating expenses, interest expense, funding for debt principal repayment, funding for inflation in asset costs, funding for historic under-investment in a system, funding for service enhancements, and funding for system growth.

The financial plan looked at all but the latter two expenses, also reviewing Lucan Biddulph's water budget for 2010 and 2011 and its actual water supply-related expenses for 2010.

Burns' memo states the 2011 budget is "believed to reasonably accurately reflect the cost of operating the system."

The system's 2011 operations budget was $319,882, with salaries and benefits making up the largest expense ($94,954).

The second-largest budgeted expense was the purchase of water ($85,000), followed by hydro ($42,000), repairs and maintenance ($25,000) and general administration ($24,250).

Net book value of the system is $8,576,683 but is expected to depreciate by about $129,000 this year.

Burns said Lucan Biddulph will also at some point add new assets to the system that will increase its value.

The memo lists potential capital works projects for the water system between 2012 and 2017 with a total cost of $830,313.

“It’s fairly aggressive," Burns told council. "It averages about $120,000 a year, but $120,000 a year is even less than the depreciation on your existing system."

Burns also presented a cost recovery analysis, which made the following assumptions:

• Each year there will be an additional 30 residential water customers who will use water at a rate and pay an amount equal to the current average residential customer;
• There will be no increase in commercial or rural water sales;
• Debenture, frontage and connection payments will remain fixed; and
• There will be no "extraordinary income items such as grants" during the life of the financial plan.

Burns told council the assumption of 30 new residential water customers each year is "about your current rate of growth."

He added later that commercial and rural water sales are not a big component of Lucan Biddulph's revenue – "Most of it's residential."

Burns said historically the township has been able to obtain grants, but the premise of the financial plan is that Lucan Biddulph won't get any.

BM Ross's analysis projects a water system operating surplus of about $21,000 this year, but Burns said that surplus is going to erode at the rate of about $4,000 a year simply through inflation.

He said the cost of water will increase at the rate of five per cent a year, and assumed electricity costs will increase at something approaching five per cent.
"By the time we get to the end of the plan period, we will no longer have a surplus," he said.

Burns added later that if Lucan Biddulph were to not increase its water rates, by 2017 it will have a deficit of about $300,000.

The memo states a rate increase is required to operate Lucan Biddulph's water system and complete the projected capital works program, adding the scale of the rate increase depends on the township's target for reserves.

Later, the document states the current annual cost of water for residential customers in Lucan Biddulph is about $199.

Rate adjustments of five per cent would increase this cost by about $10 to $13 per year to $267 in 2017.

A series of 9.3 per cent increases would increase the cost to $330 a year.

As stated, council adopted the financial plan that proposes water rate increases of five per cent, but had yet to pass a bylaw for new water rates as this week's Times-Advocate went to press.