I know we have a couple of very pressing topics.

Ms.

Manager?

Thank you, Mr.

Mayor.

First up is going to be a continued conversation on water and sewer of the public utility system budget.

In a minute, I'm going to turn it over to uh Andrew Burnham with StanTech, our consulting engineer, and David Jurgens, of course, our director of public utilities.

But before I do that, just want to set the stage a little bit.

If you recall, in January, City Council had a retreat, new city council.

We reaffirmed the vision and the strategy for how we're going to get there.

It was about a week with residents having difficulty getting water.

And if you remember those conversations, we were talking about, you know, could could something like that happen in Chesapeake?

And unfortunately, the answer is yes, it could really happen to any system.

And so that's why it's really important to make sure we're not just building new infrastructure, uh, but staying up to date with our existing infrastructure.

And as council will recall, we have some really old infrastructure in this city, right?

So the city goes back to um South Norfolk and Naufa County, and there's a lot of old infrastructure out there.

So we're we're mindful of that.

In addition, what was going on at that time were the California wildfires.

And so we were talking about, you know, the threat of wildfires here in the city, and the fact that we didn't have uh any water tankers in the fire department.

And so we we we did a lot of work this year in the budget, including funding a water tanker for for the city that there will be a dramatic health in Southern Chesapeake.

And now we want to get back to the remainder of the conversation.

If you'll recall, we took a project that would have been funded with TIFF funds out of the budget and put it back into the enterprise where it probably appropriately belongs.

But that is adding to the scope of the projects that the utility needs to fund.

So that's just uh setting the stage a little bit.

I'll turn it over now to Andrew to run through some information that we talked to you about briefly before, and then some recommendations for moving forward.

At the end of the day, you'll see no action necessary today.

This is just an opportunity to have another conversation with council, and over the next month or two, um, we'll schedule meetings with you to continue to answer any questions you might have before ultimately we bring you back an agenda item for consideration.

With that, I'll turn it over to Andrew.

Oh, thank thank you.

That's a perfect opening.

Good evening, Council.

Andy Burnham with Stantech.

I've had the opportunity to help support your decision making on utilities and rates for for a number of years and looking forward to building on our conversation in that regard from just last month.

Um we've got um just a few slides for you today, broken down really into kind of three compartments.

The first is just to kind of recap where we left off the conversation in April as a bit of a refresher and talk about some of the drivers we're seeing on utility rates today.

Then we want to go through and talk about some rate options and the critical needs that could be accommodated or funded by those different options, and then close with a discussion and understanding of just the impacts to the department as well as customers of those different options as the manager indicated.

So let me start with a little bit of a refresher from the last time we met.

So some of the context to the conversation starts with just industry perspective.

And so we've been tracking just the overall industry trends of water and sewer costs across the nation, and that's depicted here with the orange line.

And then we've also plotted here in the black line just how the city of Chesapeake has been adjusting its water and sewer rates over time from 2014 until 2025.

And you can see through about 2017 when we were doing 4.9% increases per year, we were pretty on par with the industry average in terms of cost increases.

Then we were able to hold rates steady for a couple years, and then we started some modest indexing, about two and a half percent for a couple of years, and then in 2021, that was the last full rate study that was done that established your current five-year rate plan that you have today that extends from 23 until fiscal year 27, which is at 2.9% per year for your water and sewer rates.

And so you can see since 2018, what's happened is since we've held rates flat and had lower increases, um, the industry has gone up at about two times the rates uh of the increases in the city of Chesapeake, meaning the national average water and sewer rates have gone up about twice as much as they have in the city.

And what we've seen since the last rate study has occurred are some of the drivers behind why those industry um increases have been larger than historical.

Um we've presented uh just a couple of data points here.

The chart on the left shows an index that tracks the cost of water treatment chemicals and the historical data, and the arrow indicates you know the level of that index at the time that the last study was done here in the city.

And the red dashed line indicates what would have been probably a normal forecast at the time for inflation for water treatment plant chemicals, but you can see the blue line is actually significantly higher than that forecast would have been at the time.

Similarly, if you look to the right-hand chart and look at the cost of plastic pipe, it had been pretty steady for a number of years up until and including the last rate study.

Uh but then as a result of the pandemic and some supply chain shortage and other factors, uh prices skyrocketed on plastic pipe, and they're only now beginning to come down a little bit, but they're still at significantly elevated levels above what could have been forecasted in in the prior study.

And it doesn't just affect capital cost, the up uh excuse me, the operation side, capital costs have also seen significant increases.

Again, looking at just the general construction index, which is the left-hand chart, you can see the historical data and at the time of the 21 rate study, a normal projection would have been a continuation of that linear trend.

It would have been a pretty easy forecast to make.

But what actually happened was a new reality emerged from again the pandemic and supply chain shortages where the cost of construction has gone up 33% on a general basis.

If you look at the tail end of that curve, it's actually still going up.

And on the industrial construction, it went up about 37%.

That one's a little bit more levelized.

And so all this is important to say that kind of our cost structure has really changed underneath our feet as we've had our current five-year plan in place, such that as we look forward now at new needs for rate increases, it's in a much different cost environment where the cost of operations and the cost of capital is significantly greater.

And so as we've approached looking at and updating your revenue sufficiency, measuring the adequacy of your current rates to meet your current and projected cost, both operating and capital.

This is where we've looked at a few different options, and we'll kind of step through this chart here.

But the first row shows your approved plan of increases.