2022 Water Bill Update

During the past 18 months, Minnesota, including the metro area have been experiencing a significant drought.  As a consequence of this drought, demand has increased dramatically on the City’s water system.  For example, the annual average of gallons billed for the period of 2017 through October of this year was 105,000,000 gallons.   In 2022, we are estimating that the total amount billed will be 148,000,000 gallons.  This is an increase of 41% over the 5-year average, and an incredible 86% higher than in 2020 when the gallons billed were 79,500,000.  This large increase in usage has resulted in steep increases in some costumer’s bills.  The increase in customer’s water bills has generated an increase in customer contacts about increasing water rates.  However, there was no increase in water rates for 2022.  The higher than normal water bills are strictly the result of usage with a primary factor being increased irrigation during the drought.

For water rates, the City is required by the State of Minnesota to have a conservation rate structure.  What this means is that for a typical residential property, water is billed at the lowest rate for the first 3,300 gallons used per month. The next 8,300 gallons are billed at a higher rate, and usage over 8,300 gallons is billed at the highest rate.  The goal of this type of rate structure is to reduce the amount of water wasted through excessive irrigation and leaky home appliances.  

Water, and other city utility rates, are based on an annual rate study and are designed to fund utility infrastructure without the need for highly unpopular special assessments or expensive borrowing.   For many years, the water utility in particular operated at a loss and only a subsidy from revenues received by leasing water tower space for telecom antennas allowed the fund to maintain a positive cash flow.  In addition, only a small portion of the depreciation of infrastructure was covered so future capital repairs would need to be funded through assessments and bonding.   In brief, the utility funds were operating unsustainably.

Beginning with the 2019 rate study, the rates were designed with the goal returning the funds to a stable financial condition and fully funding future capital needs.  Consistent with this goal, was the implementation of cash reserves to cover ongoing operations and future infrastructure needs.  The annual rate study now uses the annually updated Capital Improvement Plan to identify future equipment and infrastructure costs.   Inflation projections for future years are applied to the operating budget and the cash reserve needs are recalculated annually.  Based on previous usage levels, the amount of gallons billed are estimated for the upcoming years.  The anticipated water sales are then used to set the rates at a level necessary to cover the anticipated expenses and maintain the appropriate reserves.

An additional factor influencing utility rates in Orono is our unique geography around Lake Minnetonka and relatively low population densities.  This results in a much lower number of connections per mile of pipe, and other infrastructure than our more dense neighbors.  The low ratio of connections to infrastructure costs impacts more than just water rates; it also has significant impact on rates for sewer, stormwater, and curbside recycling. 

Based on the 2019 and 2020 rate studies, utility rates did increase substantially in 2020 and 2021. As a result of these increases, there was no increase in 2022 and future rate increases are projected to be in the sustainable 2% to 3% range without the need for special assessments or bonding. 

If you have additional questions about water rates, or any other financial questions, contact Ron Olson at 952.249.4611 or rolson@ci.orono.mn.us.