MERCEDES — Less than a year after the Mercedes City Commission approved a 22% increase to residents’ water bills, the utility rates are set to begin rising again soon.
The rate hikes are expected to begin July 1 and continue in a graduated rise over the next five years, according to a presentation delivered by Jeff Snowden, of Capex Consulting Group, whom the city tasked with conducting a rate study.
The move is expected to help bring parity to a utility service that has been insolvent for years — one in which the commission learned has had residential ratepayers subsidizing commercial and other large-scale water consumers.
“We’re not proposing rates that will generate tremendous surplus revenue,” Snowden explained to the commission via videoconference.
“You will have a lean water and wastewater system that pays its operations, pays its debts, and provides some surplus for capital improvements that are cash-funded.”
INSOLVENT FUND
The city’s water and wastewater fund — also called its utility fund — has experienced problems for years.
What should be a money-generating service for Mercedes has instead become a burdensome albatross that has required financial bailouts to the tune of millions of dollars paid from the city’s general fund coffers in order to keep the utility fund solvent.
That upside down financial status has, in turn, hindered the city’s ability to keep up with the routine maintenance of its water and wastewater plants. It has also put a stranglehold on any infrastructure expansion needed to meet rises in demand.
As Snowden pored over Mercedes’ utility system, he discovered that a large reason for the fund’s insolvency was due to a disparity in how customers are charged.
Whether a customer has a small five-eighths inch water meter meant for use in a single-family home, or an 8-inch line meant for commercial or industrial use, they are being charged the same base price for their connection.
The rate study showed that, regardless of meter size, Mercedes has been assessing all residential customers inside the city limits a base charge of $23.48.
All commercial customers, meanwhile, have been paying a base charge of $31.33, regardless of meter size.
Snowden illustrated just how sharp the disparity of that pricing schedule is by showing the commissioners what nearby communities charge instead.
In Brownsville, for example, commercial customers with an 8-inch water meter pay a base charge of $632, while in Mercedes, a customer with an 8-inch meter pays a base charge of just $43.36.
Regardless of which city he looked at, Mercedes was far behind the rest of the Rio Grande Valley in its base fee structure — from La Joya’s $200 for an 8-inch meter, to McAllen’s $331, to Harlingen’s $426.
Snowden found that those rate disparities continued when considering how the Queen City charges for consumption, measured in thousands of gallons. Large-scale water customers pay less there, too, compared to residents, despite the larger volumes of water they consume.
“For fiscal year (2021) — residential paid in 45% of all revenue but only used 39% of the water,” Snowden explained.
“In the case of multifamily/small business, they paid in — in ‘21 — a little less than 13% of all the revenues, but used almost 18-and-a-half percent of all billed water,” he said.
INCREASES NECESSARY
After analyzing the data, Snowden recommended increasing water and sewer rates gradually over time, with smaller increases impacting residential users, while larger jumps will be used to eventually bring commercial and multifamily units in line.
“Over the same five years, the larger meters — which currently do not pay near what others pay in the Valley and indeed, nationwide — we gradually phase in their rates to where they become on par with the peer group,” Snowden said.
Residential customers can expect to see their bills increase by an average of $1.55 beginning next month — from about $74.84 to $76.39, according to figures shown in the rate study.
Those increases will continue at an average rate of 1.6% beginning on Oct. 1 of every year until 2026 .
That means that the average monthly bill for a residential customer inside the city limits will increase by about $6.52 by 2026.
Meanwhile, commercial customers are in for some sticker shock.
The rate study found that the average rate currently paid by a commercial customer who consumes 30,000 gallons of water per month is about $204.
That rate will go up by just under $18 — or nearly 9% — on Oct. 1 of this year.
The rate will continue to rise by about 7% per year until that commercial customer is paying nearly $87 more each month by 2026.
At that point, the average water bill for that commercial customer will be about $290.
“After this is over, residential (customers) will no longer subsidize, in part, multifamily and commercial (customers). They will pay their own share based on consumption,” Snowden said.
Mercedes will, however, continue to offer deeply discounted rates to its senior citizen residents.
Once implemented, the rate increases will help the utility fund finally become self-sufficient. It’ll also help make the utility fund attractive as Mercedes pursues those long-awaited infrastructure improvements.
“The rates I am proposing will generate enough revenue over 10 years to address both of those objectives — to repay the general fund in full, which is the $3.2 million payable, and to create a 60-day operating and maintenance reserve, which will address the concerns of your bond rating agency,” Snowden said.
The commission unanimously approved the first reading of the ordinance to implement the new rates. It is expected to give final approval during its June 21 meeting.
