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HomeMy WebLinkAboutFIN-08-114 - Rental Water Heater Program1 Ksrc~ivER - • Financial Services Report To: Finance & Corporate Services Committee Date of Meeting: September 8, 2008 Submitted By: Pauline Houston, GM Community Services and City Treasurer Prepared By: Sue Dent, Acting Manager, Utilities Programs Wards) Involved: All Date of Report: August 8, 2008 Report No.: FIN-08-114 Subject: RENTAL WATER HEATER PROGRAM RECOMMENDATION: THAT rental water heater rates be increased as per the attached Appendix 1 effective January 1, 2009; and further, THAT Kitchener Utilities maintain its competitive advantage by maintaining rates below market but raise rates on a periodic basis based on the costs of the program while continuing to provide a fair rate of return to the Corporation. EXECUTIVE SUMMARY: Kitchener Utilities has been renting natural gas water heaters to Kitchener residents since the late 1980's. Since 2002 the cost to deliver this service to our customers has increased overall by 31 %. Customer Service costs have almost doubled over this same period. This is significant, but research indicates that Customer Service is the single most important reason why residents rent their water heater from Kitchener Utilities. Kitchener Utilities' current rental rates are anywhere from 23% to 48% less than the competition. The last time rates were increased across the board was in 2001. These, and several other factors (as detailed later in this report), will result in significant financial pressures on the Rental Water Heater Program in the next five years. In order to ensure Kitchener Utilities can continue to service our customers at the level to which they are accustomed, and to avoid cross-subsidization, rental rates will need to be increased for all customers. BACKGROUND: The Rental Water Heater Program was established in the late 1980's to ensure affordable hot water service for Kitchener residents and to support the natural gas delivery program by balancing the summer load and increasing customer loyalty. The original program goals were to service Kitchener residents' hot water needs by delivering a program with economical rental rates and great customer service. Since the program's inception, there have been two major rental rate increases - in 1999 and 2001. Staff felt it was important to do customer research prior to increasing the water heater rental rates to understand and consider our customers' view point in regard to rate increases. We did this through some focus group sessions with customers as well as a telephone survey. This report is being brought forward at this time to allow the City's IT Department time to implement the rate change in CIS before January 1, 2009. REPORT: There are a number of issues that are now, or will be in the near future, affecting the financial viability of the Rental Water Heater Program. These issues are discussed below. Rental Rates The last across-the-board rental rate increase was in 2001. With the introduction of flammable vapour technology in 2004, rates on two models with this new technology were increased in 2005. This increase only affects customers as the new tanks are installed. As flammable vapour technology was introduced to other models, some rental rates were increased but others were not. The result is that currently 81.4% of Kitchener Utilities' Rental Water Heater customers are paying rental rates at the 2001 level. Kitchener Utilities rental rates are between 23% and 48% less than the competition. Our research indicates that the majority of customers either do not know how the rates compare or believe that the rates are comparable to the competition. Water Heater Costs Our current water heater supplier has announced several price increases this year including a 17% increase on 1 July 2008 and another 5% for 1 September 2008. These increases are due to the increased price of steel (and to some extent, copper). Kitchener Utilities has not been affected by these increases this year as we have contracted rates with our supplier. However, these increases, along with the increasing cost of transportation, will affect costs in 2009 when we expect an increase of approximately 20%. Venting Originally, Kitchener Utilities would pay for the venting to be installed in homes that converted to a rental power vented water heater. But, if a rental power vented water heater was installed in a new home, the Builder was responsible for the venting. This became an issue when these Builder-installed water heaters had to be replaced. These customers would have to pay for any venting upgrades that were required, while others who had converted their rental tank would not have to pay for venting upgrades. In order to treat all of our customers equally, Kitchener Utilities has taken ownership of all venting as required for power vented water heaters, so the replacement is a cost to the Program. Due to failures in ABS venting, the standard was changed to 636 PVC. New and replacement installations all have this new venting installed. Additional costs are being, and will be, incurred as the existing ABS venting gets older and start to fail. On some units, his venting must be replaced with the new PVC venting even though the water heater is not being replaced. Maintenance There are several issues related to maintenance that are currently under discussion. The high calcium levels in our water, and high salt levels in homes with a water softener, are detrimental to the longevity of water heaters. Calcium causes a tank and relief valve to lime up and salt corrodes the anode and then the tank resulting in leakage. As the result of an order served us from the Technical Standards and Safety Association (TSSA), there is an expectation to maintain rental water heaters according to the manufacturers' instructions. This will significantly increase the number of inspections that will need to be performed and the associated costs. We are also seeing increasing maintenance costs as a result of extending the life of our rental tanks. Tanks up to 10 years of age are repaired (where possible) rather than replaced (used to be replaced after 8 years}. This extension was to take advantage of the fact that the tanks are fully depreciated after 7 years. New "Depressurization" Code As codes and regulations change, conventional water heaters could no longer be approved for installation in residences due to safety concerns with carbon monoxide. This code is already in effect in British Columbia and Alberta. The code requires that in new, air-tight homes a power vent water heater must be installed. We expect to see a similar code in Ontario in the next 12 to 24 months. Currently, approximately 57% of rental tanks are conventional and 34% of these are 8 or more years old. "Energy Star" for Water Heaters Currently, water heaters have an efficiency of 60%. The first phase (effective January 2009) would see efficiency increase to at least 62%. The second phase (effective September 2010) would see an increase to at least 67%. These water heaters will be taller than regular water heaters which will result in increased installation costs as all the infrastructure around the water heater will also need to be changed or modified (venting, gas piping, water piping). Installation Allowances As an incentive to try to gain back some of our lost builder market, we have increased the installation allowances to builders who install power vent models of water heaters. Builders now qualify for the 636 PVC installation allowance. Due to the increasing price of fuel, our installing dealers are requesting a fuel surcharge of 5%. FINANCIAL IMPLICATIONS: As previously mentioned, the majority of Kitchener Utilities rental water heater customers are paying rates that have not been increased since 2001. Costs to provide these services have increased over this time period and will continue to increase due the various factors outlined above. COMMUNICATIONS: Staff has conducted focus group sessions with some of our rental water heater customers. It was clear that these customers did not want Kitchener Utilities to spend a lot of money communicating this rate increase. The most popular suggestion was to put a notice on the bill itself. When informed that this is not currently possible, they recommended continuation of current rate change communication methods - a bill insert with a note on the envelope indicating "important rate increase information inside". It was also important to them that the reasons for the increase be communicated. The rate change will also be communicated to customers prior to the rate change via a Your Kitchener story, and all information will be posted on the website. CONCLUSION: In order to maintain the viability of the rental water heater program, rental rates need to be increased. Staff will continue to review this program on an annual basis. Pauline Houston General Manager of Community Services and City Treasurer Dan Chapman General Manager of Financial Services and Deputy Treasurer Wally Malcolm Director of Utilities Sue Dent Acting Manager, Utilities Programs Barry Nash Manager Customer Relations APPENDIX 1 PROPOSED RENTAL WATER HEATER RATES ~3~ Current Proposed Difference Daily Cost of Monthly Rate Monthly Rate Increase Conventional 40-R-FV $10.80 $12.96 $2.16 $0.07 50-R-FV $11.00 $13.20 $2.20 $0.07 60-R-FV $11.42 $13.70 $2.28 $0.08 75-R $13.65 $16.38 $2.73 $0.09 Power Vented 40-PV-FV ~'~ $15.00 $18.00 $3.00 $0.10 50-PV-FV ~'~ $15.40 $18.48 $3.08 $0.10 60-PV-FV $18.35 $22.02 $3.67 $0.12 75-PV-FV ~'~ $19.50 $23.40 $3.90 $0.13 Direct Vented 50-DV-FV $14.25 $17.10 $2.85 $0.09 50-PV-DV $17.15 $20.58 $3.43 $0.11 50-PV-DV-H $18.75 $22.50 $3.75 $0.12 Combo Heating 40-PVA $16.73 $20.08 $3.35 $0.11 50-PVA & PVH $17.15 $20.58 $3.43 $0.11 50-DVA $15.40 $18.48 $3.08 $0.10 Air Handler 50-A65 $14.93 $17.92 $2.99 $0.10 A-Air $14.57 $17.48 $2.91 $0.10 Hi-Efficiency P R-34 $37.50 $45.00 $7.50 $0.25 Other ~2~ 40-R $8.30 $9.96 $1.66 $0.05 50-R $9.05 $10.86 $1.81 $0.06 60-R $9.80 $11.76 $1.96 $0.06 50-DV $12.50 $15.00 $2.50 $0.08 60-PV $17.30 $20.76 $3.46 $0.11 Notes: (1) Monthly rental rates for non-flammable vapour (FV) technology tanks still in service are the same and will also be increased. (2) These non-flammable vapour (FV) technology tanks are still in service. Monthly rental rates are less than the FV tanks. (3) All rates are before GST of 5%.