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CC 2014-06-24_09.b. Water Rate Adjustments FY 2014-15 to FY 2018-19MEMORANDUM TO: CITY COUNCIL FROM: GEOFF ENGLISH, DIRECTOR OF PUBLIC WORKS . DEBBIE MALICOAT, DIRECTOR OF ADMINISTRATIVE SERVICES ~ SUBJECT: CONSIDERATION OF WATER RATES FOR FISCAL YEAR 2014-15 THROUGH FISCAL YEAR 2018-19 DATE: JUNE 24, 2014 RECOMMENDATION: It is recommended the City Council: 1) conduct a public hearing to consider protests regarding the proposed water rate adjustments and in the water rate structure as outlined in the 2014 Water and Wastewater Rate Study; and 2) if there is no majority protest adopt a Resolution establishing new Water rates and rate structure effective July 26, 2014 for Fiscal year 2014-15 though Fiscal Year 2018-19. IMPACT ON FINANCIAL AND PERSONNEL RESOURCES: The proposed rate changes are anticipated to increase water revenue by 1% in Fiscal Year 2014-15, 2% in Fiscal Year 2015-16, and 3% each year for Fiscal Years 2016-17 through 2018-19. BACKGROUND: On March 25, 2014, the City Council reviewed the 2014 Water and Wastewater Rate Study prepared by Raftelis Financial Consultants, Inc. (RFC). The RFC study is intended to set rates for the next 5-year period, beginning in July 2014. The City Council directed staff to proceed to schedule the public hearing and publicly notice the rates as proposed. The study is attached for City Council reference. Based upon the provisions of Proposition 218, all affected rate payers must receive written notice by mail at least 45 days prior to the City Council consideration of adjustments. The notice must include the amount of the fee, the basis on which the fee was calculated and the date, time and place of the public hearing and must clearly advise of the right to protest the fee increase. A number of adjustments are identified in the report. Therefore, in order to implement potential adjustments timely, staff requested the City Council review the results of the study and provide direction prior to notification of the public hearing and formal consideration of the rate adjustments. If, at the conclusion of the public hearing, written protests against the proposed rate increase are received from a majority, the City Council may not adopt the proposed rates. There are currently 6,340 accounts. Therefore, 3,171 would represent a majority. At the time the report was prepared, there were 15 protest letters received. Item 9.b. - Page 1 CITY COUNCIL CONSIDERATION OF WATER RATES AND RATE STRUCTURE JUNE 24, 2014 PAGE2 Due to the past management of the rate adjustments and cost control measures implemented by the City, both the Water and Wastewater Funds have healthy fund balances. As a result, staff is pleased to report the results of the rate study recommend no increase to the wastewater rates and only modest increases to the water rates. ANAYL YSIS OF ISSUES: A number of issues impact funding needs in the enterprise system. The current rates adopted by the City Council have put the enterprise system in a solid financial position with each fund able to meet its minimum reserve policy. However, as operational costs continue to increase, and with expenses arising from new regulations and mandates, without future revenue adjustments the enterprise system would need to draw on reserves to offset annual shortfalls of approximately $520,000 in Fiscal Year 2015-16 and approximately $800,000 by Fiscal Year 2018- 19. These challenges are not unique to the City of Arroyo Grande, as many agencies throughout the state and nation face similar circumstances. ~ Water and Lopez Funds Currently, water operations are funded by a rate structure that consists of three components: a monthly service charge, a Lopez monthly base charge (both of which vary by meter size) and a volume or consumption charge (which is tiered for residential customers and uniform for non-residential customers). Rates for all three components are also differentiated between accounts located within and outside the City limits. Page 5 of the RFC report displays the current monthly charge for each of these components. RFC reviewed the revenue required in order to meet the City's ongoing operating, capital and debt needs, as well as to provide for an adequate level of reserves. Based on this analysis, it is recommended that the City increase revenue through a modest step up approach for Fiscal Years 2014-15 through 2018-19 of 1%, 2%, 3%, 3%, and 3%, respectively. This proposed approach aims to strike a balance between the recognition of the current fiscal environment and the long-term needs of the enterprise system, with a multi-year measured approach. In addition to the rate adjustments, RFC proposes, and staff concurs with, several changes to the rate structure that will respond to customer concerns or provide easier administration of the water enterprise. These include: • Charging the same rate for all accounts, whether or not they are located within the City limits. • Combining the monthly service charge and the Lopez monthly base charge as one monthly fixed charge. • Change from a 4-tiered rate structure to a 3-tiered rate structure, with expansion of the tiers. Item 9.b. - Page 2 CITY COUNCIL CONSIDERATION OF WATER RATES AND RATE STRUCTURE JUNE 24, 2014 PAGE3 Charging the same rate for all accounts and combining the service charges will provide several benefits, including the simplification of the rate structure as well as administration of the ten accounts that are outside the City limits. As shown on page 7 of the RFC report, setting water allotments for the three tiers more closely reflects the water demand of residential customers for indoor needs (Tier 1 ), outdoor needs (Tier 2) and any additional usage. This continues to encourage conservation of the City's water resources while simplifying the rate structure. In addition, RFC recommends expanding the amount of water allocated to each tier, again to more closely reflect indoor, outdoor and additional usage. For single family residences, the first tier would expand from 12 units of water to 18 units (1 unit of water is equal to 100 cubic feet or 7 48 gallons). The second tier would allocate an additional 18 units and all usage above 36 units in a bi-monthly period would fall into the third tier. Similarly, multi-family residential customers would have 18 units of water in the first tier. However, because multi-family residential customers typically do not have the same amount of outdoor water usage as single family residential customers, the second tier would only allocate an additional 9 units of water and all water usage over 27 units would fall into the third tier. Non-residential and irrigation accounts would continue to be charged a uniform rate, consistent with the current rate structure. Rate Design Water and wastewater rates are subject to Proposition 218, which in addition to a 45-day noticing requirement, has several provisions to ensure that rates are not arbitrary and capricious, are based on the cost of providing the service and that the charge imposed for the service doesn't exceed the proportional cost of service. This means that there must be a nexus between the costs and the rates that are charged, and that customer classes are charged equitably. The American Water Works Association, a leader in setting industry standards, states that "the costs of water rates and charges should be recovered from classes of customers in proportion to the cost of serving those customers." In determining the cost to provide water service, the total cost is analyzed by function and then equitably distributed to the various classes of customers. In this case, the costs of service are broken down into functional components of base cost, extra capacity or peaking cost, and customer-service related costs. Some of these are fixed and do not change regardless of the amount of water used by a customer; others are variable and depend on the amount of water consumed. For example, meter reading and billing are done for every account, regardless of how much water is used by the customer; these are categorized as fixed costs. However, chemicals and water treatment costs increase or decrease depending on the amount of water that is used by customers; these are categorized as variable costs. The City's current fixed water charge generates approximately 37% of the Item 9.b. - Page 3 CITY COUNCIL CONSIDERATION OF WATER RATES AND RATE STRUCTURE JUNE 24, 2014 PAGE4 total revenue. The proposed rate structure maintains a similar percentage of revenue from the fixed monthly charge to preserve the current level of revenue stability (37% fixed I 63% variable). Customer classes are groups of customers with similar use characteristics. In the City's case, these have been determined to be: single family residential, multi-family residential, non-residential, and irrigation. While there can be differences in use within a customer class (not all single family residences use the same amount of water each month), the class overall shares similar characteristics. The cost of providing water service is allocated to each customer class, which determines how much revenue should be generated by each class. Rates are then derived based on the number of accounts, fixed and variable cost components and usage characteristics of each class. The City has historically used water for City facilities, buildings and parks without being charged. Based on the consultant's understanding of regulations, as well as staff's discussion with other cities, the report recommends that the City begin paying for its water use. Since the City's water use falls into two categories, non- residential for buildings and irrigation for parks and landscaping, the variable rates for these customer classes will experience a slight decrease. As a result, businesses will benefit and in most cases receive an initial water rate decrease. The overall cost of each customer class has not significantly changed; however, the cost will be spread over a greater number of units of water. The volume charge will decrease in order to generate the revenue required to cover the costs for the class. Another recommended change relates to non-residential customers that have multiple accounts tied to one meter. These are typically commercial buildings, such as strip malls or office buildings subdivided into several suites, or mobile home parks. The previous rate model charged one meter fee for water, but each "additional unit" was charged the Lopez Fee. For example, office suites often share a restroom, yet currently each suite pays an independent Lopez Fee. The City has received several complaints about this and it was perceived as inequitable to charge each suite/mobile home for the Lopez Fee. The recommended rate structure combines the meter charge and Lopez Fee into one charge that is based on each meter, and provides a much lower "additional unit" fee that reflects just the customer service component of water service. This will better reflect the costs associated with this customer class and will address the concerns the City has received from ratepayers over the past several years. Due to modifications to the rate structure, there are some minor variations in the impacts of the first year rate increase on different types of customers. In order to help visualize the variations, staff analyzed the impacts on actual charges to different neighborhoods that represent typical differences in the size of homes and properties. Item 9.b. - Page 4 It e m 9 . b . - P a g e 5 CITY COUNCIL CONSIDERATION OF WATER RATES AND RATE STRUCTURE JUNE 24, 2014 PAGE 6 DISADVANTAGES: Some customers will experience higher water utility costs. ENVIRONMENTAL REVIEW: No environmental review is required for this item. PUBLIC NOTIFICATION AND COMMENTS: In compliance with Proposition 218, notices were mailed to all property owners and rate payers more than 45 days in advance of the public hearing. The Agenda was posted in front of City Hall on Thursday, June 19, 2014. The Agenda and report were posted on the City's website on Friday, June 20, 2014. All protest letters will be provided to the Council. Attachment: 1. Water and Wastewater Rate Study Report Item 9.b. - Page 6 RESOLUTION NO. A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ARROYO GRANDE ESTABLISHING WATER RATES AND CHARGES WHEREAS, Section 13.04.030 of the City of Arroyo Grande Municipal Code enables the City Council to modify, by resolution, the rates and charges for furnishing water to customers; and WHEREAS, the City has conducted a study which developed financial plans for the provision of water service that included any revenue adjustments required to meet all financial obligations, construction of the capital improvement projects determined to be necessary by the City, and maintenance of appropriate fund balances and debt service coverage requirements; and WHEREAS, water service rates and charges are designed to meet the objectives desired by the City Council which consist of operating and maintaining a safe and reliable water system, simplified rate structures that are easy to understand and administer, consideration of industry practices, and recovery of the cost of service; and WHEREAS, the City Council has reviewed and considered the information and public testimony presented at a duly noticed public hearing, and in the staff report and record of this matter; and WHEREAS, notice of the proposed increase in water rates and charges has been provided pursuant to Proposition 218, and a majority of the affected property owners and ratepayers have not presented written protests to the proposed increase in water rates and charges. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Arroyo Grande hereby adopts the water rates and service charges set forth in Exhibit "A" attached hereto and incorporated herein by this reference. BE IT FURTHER RESOLVED that this Resolution shall repeal and replace all prior inconsistent resolutions or portions thereof. On motion of Council Member , seconded by Council Member , and on the following roll call vote, to wit: AYES: NOES: ABSENT: The foregoing Resolution was passed and adopted this day of 2014. Item 9.b. - Page 7 RESOLUTION NO. PAGE2 TONYFERRARA,MAYOR ATTEST: KELLY WETMORE, CITY CLERK APPROVED AS TO CONTENT: STEVEN ADAMS, CITY MANAGER APPROVED AS TO FORM: TIMOTHY J. CARMEL, CITY ATTORNEY Item 9.b. - Page 8 Exhibit A Fixed Service Charge ($/month) Meter Size FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 5/8" 27.33 27.52 28.17 28.83 29.51 3/4" 29.32 29.53 30.22 30.94 31.67 1" 35.30 35.55 36.39 37.24 38.12 1W' 43.27 43.58 44.60 45.65 46.73 2" 65.19 65.65 67.20 68.78 70.41 3" 226.60 228.21 233.59 239.10 244.74 4" 286.38 288.42 295.21 302.17 309.31 6" 425.87 428.91 439.01 449.36 459.96 8" 585.29 589.46 603.34 617.57 632.14 Service fee per additional unit 7.40 7.45 7.63 7.81 7.99 Residential Tiered Volume Charges ($/ccf) Customer Class Allotment FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 Single Family Tier 1 1-18 ccf 3.33 3.42 3.54 3.66 3.78 Tier 2 19-36 ccf 3.67 3.76 3.90 4.03 4.16 Tier 3 >36 ccf 4.89 5.02 5.19 5.37 5.55 Multi-Family Tier 1 1-18 ccf 3.33 3.42 3.54 3.66 3.78 Tier 2 19-27 ccf 3.67 3.76 3.90 4.03 4.16 Tier 3 >27 ccf 4.89 5.02 5.19 5.37 5.55 Non-Residential Volume Charges ($/ccf) Customer Class FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 Business 3.47 3.57 3.69 3.82 3.95 Irrigation 3.71 3.81 3.94 4.08 4.21 Hydrant 5.68 5.72 5.85 5.99 6.13 Wheeling 1.89 1.91 1.95 2.00 2.04 Private Fire line Fixed Service Charge ($/month) Meter Size FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 2" 3.47 3.49 3.57 3.66 3.74 3" 10.07 10.14 10.38 10.63 10.88 4" 21.46 21.61 22.12 22.64 23.18 6" 62.34 62.78 64.26 65.78 67.33 8" 132.85 133.79 136.94 140.17 143.48 10" 238.90 240.61 246.27 252.08 258.03 Item 9.b. - Page 9 City of Arroyo Grande WATER AND WASTEWATER RATE STUDY REPORT June, 2014 Prepared By: ATTACHMENT 1 Item 9.b. - Page 10 March 13, 2014 City Council City of Arroyo Grande 1375 Ash Street Arroyo Grande, CA 93420 Subject:Water and Wastewater Rate Study Report Dear Mr. Mayor and City Council, Raftelis Financial Consultants, Inc.(RFC)is pleased to provide this Water and Wastewater Rate Study Report (Report) for the City of Arroyo Grande (City)as a periodic comprehensive update and to establish utility rates that are equitable and in compliance with Proposition 218. The major objectives of the study include the following: 1.Develop financial plans for the water and wastewater enterprises to ensure financial sufficiency, meet operation and maintenance (O&M) costs, ensure sufficient funding for capital replacement and refurbishment (R&R) needs, and maintain a strong financial outlook for the enterprises; 2.Develop sound and sufficient reserve fund targets; 3.Review current rate structures for the water and wastewater enterprises; 4.Develop a cost-of-service analysis for the water and wastewater enterprises; and 5.Develop fair and equitable utility rates. The Report summarizes the key findings and recommendations related to the development of the financial plans for the water and wastewater enterprises and the development of the updated rates. It has been a pleasure working with you,and we thank you and the City staff for the support provided during the course of this study. Sincerely, Raftelis Financial Consultants, Inc. Habib Isaac Manager Item 9.b. - Page 11 Page 3 Table of Contents E.EXECUTIVE SUMMARY ____________________________________________________________4 WATER ENTERPRISE ____________________________________________________________________4 WASTEWATER ENTERPRISE ________________________________________________________________8 1 ASSUMPTIONS USED IN THE STUDY __________________________________________________9 1.1 INFLATION ______________________________________________________________________9 1.2 GROWTH AND DEMAND FACTORS ______________________________________________________9 2 WATER SYSTEM –FINANCIAL PLAN AND RATES ________________________________________10 2.1 FINANCIAL PLAN _________________________________________________________________10 2.1.1 REVENUE REQUIREMENTS __________________________________________________________10 2.1.2 RECOMMENDATIONS AND PROPOSED FINANCIAL PLAN ______________________________________13 2.2 RATE DESIGN ___________________________________________________________________16 2.2.1 RATE METHODOLOGY BACKGROUND __________________________________________________16 2.2.2 RATE METHODOLOGY ____________________________________________________________17 2.2.3 FUNCTIONAL COST COMPONENTS ____________________________________________________17 2.2.4 PROPOSED RATE STRUCTURE________________________________________________________19 2.2.5 RESIDENTIAL RATE IMPACTS ________________________________________________________25 3 WASTEWATER SYSTEM –FINANCIAL PLAN ____________________________________________27 3.3 FINANCIAL PLAN _________________________________________________________________27 3.3.1 REVENUE REQUIREMENTS __________________________________________________________27 3.3.2 FINANCIAL PRO FORMA AT CURRENT RATES _____________________________________________29 3.3.3 RECOMMENDATIONS AND PROPOSED FINANCIAL PLAN ______________________________________30 3.4 PROPOSED WW RATES ____________________________________________________________32 EXHIBIT A –SINGLE-FAMILY RESIDNETIAL WATER RATE COMPARISON _________________________________33 EXHIBIT B –SINGLE-FAMILY RESIDNETIAL WASTEWATER RATE COMPARISON ____________________________34 APPENDIX A –DETAILED FINANCIAL PLAN PRO FORMA AT CURRENT RATES _____________________________35 APPENDIX B –DETAILED FINANCIAL PLAN PRO FORMA AT PROPOSED RATES ____________________________36 APPENDIX C –PUBLIC HYDRANT /PRIVATE FIRE LINE COST ALLOCATION _______________________________37 APPENDIX D –WATER RATE SUMMARY______________________________________________________38 Item 9.b. - Page 12 Page 4 E.Executive Summary In 2013, the City of Arroyo Grande contracted with RFC to conduct a Water and Wastewater Rate Study (Study) to develop a financial plan as well as design rates for the water and wastewater systems. The City’s Water and Wastewater Enterprises are operating in an environment where operational costs continue to increase while debt obligations and reserve funding must be satisfied to maintain a financially healthy utility. This is not a situation that is unique to the City of Arroyo Grande,as many agencies throughout the state are faced with the need to update capital infrastructure that is necessary to continue providing water and wastewater services,adhere to new regulations and mandates, and meet service demands with limited water supplies. Water Enterprise The City provides water services to a population of approximately 17,000. The City’s main source of water includes ground and surface water.The City may also purchase surplus surface water when available. The City’s water supply is crucial to provide its residents with a reliable supply of water. The current rate structure of the City consists of three components: a monthly service charge, a Lopez monthly base charge (both of which vary by meter size),and a volume charge (which is tiered for residential customers and uniform for non-residential customers).The rates of all three components are also differentiated between accounts located within and outside City limits,as shown in Tables E-2 through E-4.Table E-1 provides a summary of water accounts by meter size, with the majority of residential customers served by 5/8”and 3/4”meters.Tables E-2 and E-3 identifies the monthly service charges by meter size and Table E-4 lists the volumetric charges (also commonly referred to as commodity charges). Table E-1: Water Accounts by Meter Size Meter Sizes FYE 2014 Accounts 5/8-in or 3/4-in 5,792 1-in 372 1 1/2-in 101 2-in 55 3-in 11 4-in 7 6-in 2 8-in 0 Total Water Accounts 6,340 Item 9.b. - Page 13 Page 5 Table E-2: Current Monthly Service Charges Table E-3: Current Lopez Monthly Service Charges Table E-4: Current Volume Charges ($ / ccf1) [1] Single-Family Residential [2] Multi-Family Residential 1 1 ccf = 100 cubic feet = 748 gallons of water Meter SizeInside CityOutside City 5/8-in or 3/4-in$5.75 $7.19 1-in $6.90 $8.63 1 1/2-in $8.55 $10.69 2-in $13.00$16.25 3-in $45.65$57.06 4-in $57.65$72.19 6-in $85.95$107.44 8-in $117.75$147.19 Effective 7/1/2013 Meter SizeInside CityOutside City 5/8-in or 3/4-in$20.33$25.41 1-in $29.16$36.45 1 1/2-in $37.89$47.36 2-in $46.83$58.54 3-in $55.56$69.45 4-in $64.51$80.64 6-in $82.26$102.83 8-in $101.65$127.06 Effective 7/1/2013 TierBi-Monthly UsageInside CityOutside City SFR[1] Tier 11 – 12 $3.37$4.21 SFR Tier 213 – 32 $3.74$4.68 SFR Tier 3 33-64 $4.23$5.29 SFR Tier 4 64+$5.12$6.40 MFR[2] Tier 1 1 – 12 $3.37$4.21 MFR Tier 213 – 18 $3.74$4.68 MFR Tier 3 19-30 $4.23$5.29 MFR Tier 4 30+$5.12$6.40 Non-ResidentialUniform$3.74$4.68 IrrigationUniform$4.11$5.14 Other Uniform$3.74$4.68 Water WheelingUniform$1.29$1.29 Hydrant Uniform$23.35$23.35 Effective 7/1/2013 Item 9.b. - Page 14 Page 6 Total reserves for Fiscal Year 2014-15 is estimated at approximately $6.1M, which accounts for an operating reserve equal to ninety (90) days of operating expenses, an appropriation of capital improvements equal to $500,000, and a recommended debt service reserve equal to one year of annual debt service.However, without future revenue adjustments, the Water Enterprise would need to draw on reserves to offset annual shortfalls.Commencing in Fiscal Year 2015-16,reserves would need to cover a shortfall of approximately $520,000. By Fiscal Year 2018-19, the draw on reserves would reach an amount slightly over $800,000. In addition, starting with Fiscal Year 2019-20, reserves would be $720,000 short of the recommended minimum target and would be fully depleted by Fiscal Year 2021- 22.The City also has debt obligations and corresponding bond covenants to fulfill on an annual basis. With current rate revenue, the City would not satisfy its 125% bond coverage ratio commencing in Fiscal Year 2018-19. After review of the Water Enterprise’s revenue requirements, reserves, debt obligatio ns, and current revenues, it is recommended that the City adjust revenue through a modest step up approach for Fiscal Year 2014-15 through Fiscal Year 2018-19 (1%, 2%, 3%, 3%, 3%).The proposed financial plan for the water system aims to strike a balance between the recognition of the current fiscal landscape with a multi-year measured approach. Under the proposed plan, the Water Enterprise will maintain reserves above the minimum target throughout Fiscal Year 2021-22. In order to mitigate long-term impacts to customers while maintaining the fund’s finances, a “step-up” rate-adjustment approach is proposed (rather than imposing a 5% annual increase beginning in Fiscal Year 2016-17). Through our analysis, RFC reviewed the current rate structure and consumption files to determine the most appropriate rate structure to employ moving forward. As such, RFC is recommending the following proposed adjustments to the current rate structure: RFC recommends that all accounts (whether or not they are located within City limits) be charged the same rates.Typically, differentiating rates between customers inside and outside the City is commonly employed when additional facilities are required to serve those customers, such as an additional pumping station,storage facilities, or transmission and distribution improvements. The costs associated with these facilities should then be accounted for separately to track the additional “cost of service”incurred to serve these accounts, which would justify the higher water rates in compliance with Proposition 218. The City currently only has ten (10)accounts that are outside City limits and keeping track of the facilities that serve these properties and associated costs would be tedious and require additional staff time that would not be cost effective. Therefore, it is recommended that all accounts are charged based on one rate schedule that differs by meter size and customer class. RFC also recommends combining the monthly service charge and Lopez charge as one monthly fixed charge. Doing so would simplify the City’s rate schedule for its customers and establish a fixed revenue stream that provides more flexibility to the City. Although the new recommended fixed charge still includes costs associated with the Lopez Water Supply, it is not a separate charge that appears to be solely designated for the Lopez Water Supply. The City should still maintain its separate fund for Lopez (Fund 641) and only transfer the amount necessary to meet the annual obligation each year. The remaining revenue from the monthly fixed charge would be used for other fixed charges and the build-up of reserves within the Water Operating Fund (Fund 640). Item 9.b. - Page 15 Page 7 Lastly, RFC recommends changing the City’s current water rate structure from a 4-tiered rate structure to a 3-tiered rate structure. In reviewing the consumption files and analyzing the amount of consumption by tier for residential customers, only 4% of total annual consumption falls within Tier 4 as shown on Table E-5 and E-6 for Single-Family Residential (SFR)and Multi-Family Residential (MFR), respectively. Table E-5:Single-Family Residential Current Annual Usage by Tier (ccf) Table E-6: Multi-Family Residential Current Annual Usage by Tier (ccf) Setting water allotments for three tiers more closely reflects the water demand of residential customers for indoor needs (Tier 1), outdoor needs (Tier 2), and any additional usage above Tiers 1 and 2 (Tier 3). In analyzing the usage characteristics of residential customers,usage in the winter was used as a proxy to determine the indoor demand of customers as outdoor usage during the winter season is typically reduced to a negligible amount. As such,usage per account in January and February of 2012 equaled approximately 15 units of water, which reflects 75 gallons per capita per day. Similar to using winter usage to determine indoor water demand, peak residential usage in the summer can be used to determine the water demand for outdoor needs as peaking is primarily as result of increased irrigation. Summer usage averaged approximately 32 units of water per account. Because usage varies from month to month and between accounts, a buffer is recommended when setting allotments for each Tier. Consequently, it is recommended that for SFR,Tier 1 be set at 18 units to capture residential indoor water demand and Tier 2 be set at an additional 18 units of water for a total allotment of 36 units, which captures the average usage in summer of 32 units. MFR customers would be a similar structure; however,MFR customers typically do not have the same amount of outdoor water demand when compared to SFR properties.As a result, it is recommended Tier 1 would be the same allotment, but Tier 2 would be 9 units instead of 18 units. These allotments are on a per unit basis. As such, a three-unit complex would have a tier 1 allotment equal to 54 units and an additional Tier 2 allotment of 27 units of water. Non-residential and irrigation accounts would still be charged a uniform rate consistent with the current rate structure. Tier Allotment Total Allocation Tier Usage Percentage Tier 1 12 12 358,907 44% Tier 2 20 32 307,365 37% Tier 3 32 64 122,780 15% Tier 4 >64 N/A 32,281 4% Tier Allotment Total Allocation Tier Usage Percentage Tier 1 12 12 88,846 86% Tier 2 6 18 8,067 8% Tier 3 12 30 2,735 3% Tier 4 > 30 N/A 4,107 4% Item 9.b. - Page 16 Page 8 Wastewater Enterprise The current wastewater (WW) rate structure consists of monthly base service charges (by dwelling unit) for all customer classes and a discharge or commodity rate per hundred cubic feet (CCF). Current WW rates are shown in Tables E-7 and E-8. Table E-7: Current WW Monthly Base Charges Description Effective 7/1/2013 Inside City $2.40 Outside City $3.00 Table E-8: Current WW Discharge Rates ($ / ccf) Description Effective 7/1/2013 Location Inside City Outside City SFR $0.67 $0.84 MFR $0.94 $1.18 Business $1.32 $1.65 Church $1.32 $1.65 School $1.32 $1.65 Hospital $1.32 $1.65 Motel $1.32 $1.65 Convalescent Home $1.32 $1.65 Other $1.32 $1.65 Based on current rates and an analysis of revenue requirements for the Wastewater Enterprise, t he current wastewater rates will continue to generate positive net income for at least the next five years . As a result,the City has been able to build healthy fund balance for operations and capital repair & replacement expenditures.Therefore,it is recommended that the City maintain its current wastewater rate schedule,as increases are not necessary at this time .We recommend that the City periodically review the Wastewater Enterprise to determine if adjustments are needed at a later date, but at this point,and based on the current revenue requirements, revenue adjustments are not necessary . Item 9.b. - Page 17 Page 9 1 Assumptions Used in the Study The period for the Water and Wastewater Financial Plan Study is for Fiscal Year 2013-14 through Fiscal Year 2022-23.2 Various types of assumptions and inputs were incorporated into the Study. These assumptions were based on discussion with and/or direction from City management. Assumptions include growth rates for customer accounts,annual consumption for different customer classes, reduced water demand factors for recent conservation goals of the City, inflation factors, and other miscellaneous assumptions. These assumptions are presented in Tables 1-1 and 1-2. 1.1 Inflation Table 1-1: Inflation Factor Assumptions KEY FACTORS FYE 2015 FYE 2016 FYE 2017 FYE 2018 FYE 2019 General 3%3%3%3%3% Salary 3%3%3%3%3% Benefits 3%3%3%3%3% Capital 3%3%3%3%3% Energy 5%5%5%5%5% 1.2 Growth and Demand Factors Table 1-2:Account Growth Rate Assumptions and Potable Water Demand Factor FYE 2015 FYE 2016 FYE 2017 FYE 2018 FYE 2019 GROWTH RATE[1] All Customer Classes <1%<1%<1%<1%<1% OTHER REVENUES PROJECTIONS Interest Earnings 1%1%1%1%1% Property Lease 1%1%1%1%1% General 1%1%1%1%1% Non-Inflated 1%0%0%0%0% WATER DEMAND FACTOR % of prior year consumption Water Reduction Factor 2%2%1%1%1% [1] The growth rate for the City is less than 1%; therefore, rates were calculated based on a conservative growth rate equal to zero. 2 For brevity of presentation, certain tables in this report show the five -year period for FYE 2015 through FYE 2019. Item 9.b. - Page 18 Page 10 2 Water System –Financial Plan and Rates 2.1 Financial Plan 2.1.1 Revenue Requirements A review of a utility’s revenue requirements is a key step in the rate design process. The review involves analyses of annual operating revenues under the current rates, operation and maintenance (O&M) expenses, capital expenditures, transfers between funds, and reserve requirements. This section of the report provides a discussion on projected revenues, O&M and capital expenditures, the capital improvement financing plan, debt service requirements, and revenue adjustments required to ensure the fiscal sustainability of the Water Enterprise. 2.1.1.1 Revenues from Current Rates The current water rate structure consists of three components:a monthly service charge,a Lopez monthly base charge (both of which vary by meter size),and a volume charge (which is tiered for residential customers and uniform for non-residential customers). The projected water revenues for the Water Enterprise derived from current rates are shown in Table 2-1. Table 2-1: Projected Water Revenues at current FYE 2013-14 Rates FYE 2015 FYE 2016 FYE 2017 FYE 2018 FYE 2019 Fixed Revenue $2,399,760 $2,399,760 $2,399,760 $2,399,760 $2,399,760 Variable Rate Revenue[1]$4,098,428 $4,016,460 $3,976,295 $3,936,532 $3,897,167 Total Water Revenues $6,498,188 $6,416,220 $6,376,055 $6,336,292 $6,296,927 [1] An annual reduction in variable revenue is shown as water demand is assumed to reduce each year by the Water Demand Factor (listed in Table 1-2)to account for the continued need for customer to conserve water to meet SB7x-7 requirements of 20% reduction per capita by 2020. 2.1.1.2 O&M Expenses The City’s Fiscal Year 2013-14 budget values and the assumed inflation factors for the study period were used as the basis for projecting O&M costs. Table 2-2 shows total budgeted and projected O&M expenses, including debt,for Fiscal Year 2014-15 and subsequent four years of the study period. Table 2-2: Projected Water O&M Expenses FYE 2015 FYE 2016 FYE 2017 FYE 2018 FYE 2019 Total Operating Expenses $6,222,197 $6,337,049 $6,494,449 $6,626,335 $6,787,210 2.1.1.3 Capital Improvement Plan and Asset R&R The City has adopted a long-term capital improvement plan (CIP) to address future Water Enterprise needs. Table 2-3 shows the most recent 5-year CIP from the City. The Water Enterprise’s future CIP needs will be funded through proposed rates on a Pay-As-You-Go basis (PAYGO),as the City currently does not anticipate the use of debt-financing. Therefore,no debt is proposed to fund CIP for the Water Enterprise. Item 9.b. - Page 19 Page 11 Table 2-3: Water Capital Expenditures [1] [1]Please note that the costs presented in Table 2-3 only includes those costs related to the water portion of the project and not the entire cost. 2.1.1.4 Reserve Requirements To ensure a strong financial outlook and credit rating, RFC recommends a few adjustments to the City’s current reserve policy. Currently, the City has an Operating Reserve equal to 60 days of the Water Enterprise’s annual O&M expenses plus $500,000 for ongoing capital. The following is the recommended reserves to maintain for the Water Enterprise Fund. Operating Reserve –The operating reserve is used primarily to meet ongoing cash flow requirements.Given that a majority of the City’s water revenue is through its commodity charge (63% of revenue),RFC recommends increasing the operating reserve target from 60 days to 90-days of O&M expenses.As the potential of revenue volatility increases, reserves should be set at an amount to offset this revenue reliability.A 90-day reserve ensures working capital to support the operation, maintenance and administration of the utility. Maintaining this level of reserves also provides liquid funds for the continued ongoing operations of the utility in the event of unforeseen costs or interruption with the utility or the bi-monthly billing system. Capital Reserve –Based on the expected cost of the City’s future CIP expenditure, RFC recommends maintaining a minimum capital reserve at the current amount of $500,000. Debt Service Reserve –Based on the outstanding debt obligation of the City for the Lopez Water Supply, it is recommended that the City establish a debt serve reserve equal to 1-year of annual debt (approximately $1.4M). This debt is not only an ongoing obligation, but it also funds the primary water source of the City. As such, the Lopez Water Supply is a critical asset of the City and establishing a reserve as security will ensure sufficient bond coverage and potentially mitigate future revenue increases caused by new projects associated with the Lopez Dam.The reserve can also be drawn upon during times of reduced consumption without affecting operations or scheduled capital improvement projects. Collectively, total minimum reserve target of the Water Utility would equal approximately $3.2M, which reflects approximately 220 days of liquid equity. FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 Leanna Drive Creek Crossing Upgrade $36,300 $290,400 SCADA Radio Upgrades $41,400 Reservoir 3 and 4 Coating and Seismic Evaluation $79,900 $638,800 Phased Mains Replacement -Fair Oaks $134,700 Reservoir 7 $509,200 Galvanized Service Replacement $35,000 $35,000 $35,000 $35,000 $35,000 Corporation Yard Upgrade $150,000 $15,000 Le Point Area Main Upgrade $38,000 $304,050 $397,400 $420,300 $711,800 $339,050 $544,200 City of Arroyo Grande Water Capital Improvement Plan Item 9.b. - Page 20 Page 12 2.1.1.5 Financial Pro Forma at Current Rates Table 2-4 displays a summary pro forma of the Water Enterprise’s funds under current rates over the forecast period (Appendix “A” provides a detailed summary of Table 2-4). All projections shown in the table are based on the current rate structure and do not include any revenue adjustments. Under this scenario, revenues generated from rates and other miscellaneous revenues are slightly less than operating expenses of the Water Enterprise for Fiscal Year 2014-15; however,as O&M costs increase through annual inflationary adjustments,current revenues cannot fully fund O&M, capital, and debt obligations without drawing down reserves each year.Commencing in Fiscal Year 2015-16, reserves would need to cover a shortfall of approximately $520,000. By Fiscal Year 2018-19, the draw on reserves would reach an amount slightly over $800,000. In addition, starting with Fiscal Year 2019-20, reserves would be $720,000 short of the recommended minimum target and would be fully depleted by Fiscal Year 2021-22.In addition, the City currently has debt obligations and corresponding bond covenants to fulfill on an annual basis. With current rate revenue, the City would not satisfy its 125% bond coverage ratio commencing in Fiscal Year 2018-19. In conclusion,the City will likely be unable to maintain fiscal sustainability and solvency under the current rates. Table 2-4:Financial Plan Pro-forma at Current Rates Water Enterprise Fund FY 2014FY 2015FY 2016FY 2017FY 2018FY 2019FY 2020FY 2021FY 2022FY 2023 Beginning Balances$5,867,131$6,263,866$6,232,158$5,712,128$5,367,283$4,645,640$3,830,757$2,586,545$1,339,548($169,566) TOTAL REVENUES (FUND 640 and 641)6,694,429$6,610,788$6,528,820$6,488,655$6,448,892$6,409,527$6,370,555$6,331,973$6,293,777$6,255,963$ TOTAL EXPENDITURES (FUND 640 and 641)(6,297,694)$(6,642,497)$(7,048,849)$(6,833,499)$(7,170,535)$(7,224,410)$(7,614,767)$(7,578,970)$(7,802,891)$(8,086,905)$ Total Water Enterprise Ending Fund Balance 6,263,866$6,232,158$5,712,128$5,367,283$4,645,640$3,830,757$2,586,545$1,339,548$(169,566)$(2,000,508)$ Total Water Enterprise Reserve Target 3,044,366$3,124,841$3,153,554$3,192,904$3,225,876$3,266,095$3,307,584$3,350,385$3,394,540$3,440,093$ Alert - Revenues < Desired TargetN/A N/AN/AN/AN/AN/A(721,039)$(2,010,836)$(3,564,105)$(5,440,601)$ Debt Coverage for COPs 366%280%182%217%142%123%37%36%-16%-81% Item 9.b. - Page 21 Page 13 2.1.2 Recommendations and Proposed Financial Plan 2.1.2.1 Proposed Revenue Adjustments To ensure that the Water Enterprise will have adequate revenues to fund operating expenses, capital expenditures,and comply with its bond covenants,it is recommended that the City implement revenue adjustments equal to 1%, 2%, 3%, 3%, and 3% for Fiscal Year 2014-15 through Fiscal Year 2018-19,respectively.These proposed revenue adjustments would occur on July 1st for each year of the five years, commencing on July 1,2014. The proposed revenue adjustments would enable the Enterprise to complete the planned capital projects for the Study period while maintain reserves above the Enterprise’s recommended minimum reserve levels.The proposed adjustments also allow the City to maintain compliance with its bond covenant of 125 percent coverage through the planning horizon. 2.1.2.2 Proposed Financial Plan A pro forma of the proposed revenue requirements is shown in Table 2-5 below (Appendix “B” provides a detailed summary of Table 2-5). The proposed revenue requirements account for the City’s financial needs,meeting target reserve balances and achieving positive net revenues through the study period while addressing the City’s O&M and CIP needs.Additionally, the Water Enterprise will satisfy its debt reserve requirement of 125%in future years. Table 2-5:Ten-Year Water Enterprise Proposed Financial Plan -Pro-forma 2.1.2.3 10-Year Proposed Financial Outlook Although the pro forma reflect a ten-year planning horizon,recommended revenue adjustments are only for the next five years and the figures below reflect Fiscal Year 2014-15 through Fiscal Year 2018-19.Figures 2-1,2-2,2-3 and 2-4 illustrate the projected five-year financial plan for the Water Enterprise. Figure 2-1 displays the proposed and expected revenue adjustments through Fiscal Year 2018-19 (3% annual adjustments). Figure 2-2 illustrates the operating position of the Water Enterprise, where the expenses, inclusive of reserve funding, are shown by stacked bars and total revenues at current rates and proposed rates are shown by the horizontal trend lines,where proposed revenue is above the bars. Figure 2-3 summarizes the projected CIP and its funding sources, which is 100% PAYGO funding.There is no debt shown because the proposed financial plan does not propose any new debt.The ending total fund balance for the water utility –inclusive of both the operating and capital funds –is projected and shown in Figure 2-4, where the horizontal trend line indicates the target reserve balance as recommended by the reserve requirements discussed in Section 2.1.1.4. Water Enterprise Fund FY 2014FY 2015FY 2016FY 2017FY 2018FY 2019FY 2020FY 2021FY 2022FY 2023 Beginning Balances$5,867,131$6,263,866$6,297,139$5,970,879$6,015,650$5,882,897$5,859,709$5,613,636$5,574,965$5,488,218 TOTAL REVENUES (FUND 640 and 641)6,694,429$6,675,770$6,722,589$6,878,270$7,037,782$7,201,223$7,368,694$7,540,299$7,716,144$7,896,339$ TOTAL EXPENDITURES (FUND 640 and 641)(6,297,694)$(6,642,497)$(7,048,849)$(6,833,499)$(7,170,535)$(7,224,410)$(7,614,767)$(7,578,970)$(7,802,891)$(8,086,905)$ Total Water Enterprise Ending Fund Balance 6,263,866$6,297,139$5,970,879$6,015,650$5,882,897$5,859,709$5,613,636$5,574,965$5,488,218$5,297,653$ Total Water Enterprise Reserve Target 3,044,366$3,124,841$3,153,554$3,192,904$3,225,876$3,266,095$3,307,584$3,350,385$3,394,540$3,440,093$ Alert - Revenues < Desired TargetN/A N/AN/AN/AN/AN/AN/AN/AN/AN/A Debt Coverage for COPs 366%293%221%295%260%282%237%279%269%248% Item 9.b. - Page 22 Page 14 Figure 2-1: Proposed and Expected Revenue Adjustments Figure 2-2: Proposed Operating Financial Plan Item 9.b. - Page 23 Page 15 Figure 2-3: Projected CIP and Funding Sources for Water Enterprise Funds Figure 2-4: Projected Ending Balances for Water Enterprise Funds Item 9.b. - Page 24 Page 16 2.2 Rate Design 2.2.1 Rate Methodology Background Proposition 218 (California Constitution Article 13D) states that: 1.A property-related charge (such as water rates) imposed by a public agency on a parcel shall not exceed the funds required to provide the property related service. 2.Revenues derived by the charge shall not be used for any other purpose other than that for which the charge was imposed. 3.The amount of the charge imposed upon any parcel shall not exceed the proportional cost of service attributable to the parcel. 4.No charge may be imposed for a service unless that service is actually used or immediately available to the owner of property. 5.A written notice of the proposed charge shall be mailed to the record owner of each parcel at least 45 days prior to the public hearing, when the agency considers all written protests against the charge. Prop 218 ensures that Water Rates cannot be “arbitrary and capricious,” meaning that the rate- setting methodology must be sound and that there must be a nexus between costs and the rate charge. In the Rate Methodology, RFC ensures that all aspects of Proposition 218 are followed and that it creates rates that charge customers equitably.In addition,as stated in the American Water Works Association (AWWA)Manual M1, “the costs of water rates and charges should be recovered from classes of customers in proportion to the cost of serving those customers.” In conjunction with Proposition 218, Article X (2) of the State Constitution established the need to preserve the State’s water supplies and to discourage the wasteful or unreasonable use of water by encouraging conservation.In addition,Section 106 of the Water Code declares that the highest use of water is for domestic purposes, and irrigation is secondary. In connection with meeting the objectives of Article X, Water Code Sections 370 (AB2882) and 375 authorize a water purveyor to utilize its water rate design to incentivize the efficient use of water. Although incentives to conserve water could be provided by implementing a higher rate for water as consumption increases, a nexus between rates and cost incurred to provide water at those rates must be developed to achieve compliance with Proposition 218.For this analysis, consumption and peaking characteristics of customers as well as available water supplies of the City were analyzed to appropriately allocate costs between customer classes.Variable costs were separated into two discrete components (base and peak costs)to reflect the cost incurred by the Water Utility.Furthermore,for residential customers, costs were further apportioned between defined tiers to determine the proportional share of cost incurred by such tier.This approach synchronizes the objectives of Article X (2) and Proposition 218 in developing a cost of service tiered rate structure. Item 9.b. - Page 25 Page 17 2.2.2 Rate Methodology The enterprise’s revenue requirements are, by definition, the cost of providing service. This cost is then used as the basis to develop unit costs for the water components and to allocate costs to the various customer classes in proportion to the water services rendered. The concept of proportionate allocation to customer classes requires that allocations should consider not only the average quantity of water used but also the peak rate at which it is consumed. This is because the water system is designed to handle peak demands,and the additional costs associated with design,construction and maintenance of facilities specified to meet these peak demands need to be allocated to those incurring such costs so that the costs can be recovered appropriately. This study calculated water rates based on Fiscal Year 2013-14 as the base year for the new rates to be proposed.The annual revenue requirements or costs of service to be recovered from rates include O&M expenses,debt service and coverage,water supply,capital costs, and funding of reserves. O&M expenses include costs directly related to the supply, treatment, and distribution of water as well as routine maintenance of system facilities. The total Fiscal Year 2014-15 cost of service to be recovered through rates from the water enterprise’s customers, shown in Table 2-6 on the following page,is estimated at approximately $6.5M.The cost of service analysis is based upon the premise that the utility must generate annual revenues adequate to meet the estimated annual revenue requirements. To allocate the cost of service among the different customer classes, costs first need to be allocated to the appropriate water cost components. The following section describes the allocation of the operating and capital costs of service to the appropriate parameters of the water system. 2.2.3 Functional Cost Components The total cost of water service is analyzed by system function in order to equitably distribute costs of service to the various classes of customers. For this analysis, water utility costs of service are assigned under the Base-Extra Capacity method to three basic functional cost components: base costs, extra capacity or peaking costs, and customer service-related costs. This method is consistent with the American Water Works Association M1 Manual, and is widely used in the water industry to design rates for retail customers.Table 2-6 shows a summary by function for each year of the five-year study period, and Table 2-7 provides a breakdown of the City’s revenue requirements by functional cost components, using a ten-year annual average to account for how costs are incurred over time. Item 9.b. - Page 26 Page 18 Table 2-6: Revenue Requirements by Function –FYE 2014 through FYE 2019 Table 2-7:Detailed Revenue Requirements by Function -10-Year Average BaseMax DayMax Hour Customer Service Meters & Services Fire Protection 100.0%44.1%16.1%2.3%11.4%15.7%10.5% Fiscal Year Ending FYE 2015 $6,563,170$2,891,533$1,056,757$149,939$747,887$1,027,856$689,199 FYE 2016 $6,609,989$2,912,160$1,064,295$151,008$753,222$1,035,188$694,115 FYE 2017 $6,765,670$2,980,749$1,089,362$154,565$770,962$1,059,569$710,463 FYE 2018 $6,925,182$3,051,025$1,115,045$158,209$789,139$1,084,550$727,213 FYE 2019 $7,088,623$3,123,032$1,141,362$161,943$807,763$1,110,147$744,376 Fixed 62%38% Base - Variable Description Total Water Expenses (10-Yr Average)BaseMax DayMax Hour Customer Service Meters & Services Fire Protection % Allocation 100.0%44.1%16.1%2.3%11.4%15.7%10.5% Total Allocation 8,809,020 3,880,9871,418,368201,2461,003,8061,379,578925,035 Salaries & Ben - Admin.236,824 ---118,412118,412 - Salaries & Ben - Prod.115,751 28,93828,938 -28,93828,938 - Salaries & Ben - Distr.361,869 90,46790,467 -90,46790,467 - Office Expense 5,159 ---5,159 -- Postage/Mailing 22,928 ---22,928 -- Advertising 688 ---688 -- Contractual Services 139,974 139,974 ----- Water Treatment Services 17,196 17,196 ----- Pre-Employment Physicals 229 ---229 -- Telephone 917 ---917 -- Travel/Conference/Training 2,293 ---2,293 -- Memberships & Subscriptions 1,261 ---1,261 -- Bank Charges 43,391 ---43,391 -- Insurance Claims/Settlements 31,445 ---31,445 -- Insurance-Underground Tanks 503 ---503 -- Maintenance-Office Equipment 1,146 ---1,146 -- Contractual Services 174,710 174,710 ----- Power (Production)125,779 --125,779 --- Maintenance-Machinery & Equip 22,928 22,928 ----- Water Meters 40,124 ----40,124 - Special Dept. Supplies 4,586 4,586 ----- Small Tools 2,866 2,866 ----- Chemicals 27,513 27,513 ----- Contractual Services 22,928 22,928 ----- Pre-Employment Physicals 344 344 ----- Power (Distribution)75,467 --75,467 --- Travel/Conference/Training 3,439 ---3,439 -- Rent-Equipment 1,146 1,146 ----- Maintenance-Vehicles 8,163 8,163 ----- Maintenance-Machinery & Equipment 6,997 6,997 ----- Maintenance-Buildings 2,332 ---2,332 -- Gas & Oil 20,125 10,705 9,420 ---- Maintenance-Reservoirs 5,831 2,047 1,801 ---1,982 Maintenance-Wells/Lines/Pumps 58,306 20,46918,013 ---19,824 Maintenance-Meters 4,664 ----4,664 - Conservation Programs 50,796 -50,796 ---- Existing Debt Service 8,800 ---8,800 -- Direct Personnel Transfers 628,659 ---314,330314,330 - Direct Operating Transfers 257,855 64,46464,464 -128,928 -- Cost Allocation Transfers 396,402 ---198,201198,201 - Lopez Maintenance & Operations - Routine 1,649,4891,649,489 ----- Lopez Maintenance & Operations - Non-Routine 74,621 39,69234,929 ---- Lopez Maintenance & Operations- Pigging 101,062 53,75747,306 ---- Lopez Maintenance & Operations- Capital Overlay 254,653 135,454119,199 ---- Lopez Cost Allocation Transfer 352,858 352,858 ----- Lopez Debt Service 498,827 109,742109,742 --109,742169,601 SRF Debt Service 929,829 204,562204,562 --204,562316,142 Leanna Drive Creek Crossing Upgrade 290,400 154,468135,932 ---- Reservoir 3 and 4 Coating and Seismic Evaluation 718,700 158,114158,114 --158,114244,358 Reservoir 7 509,200 112,024112,024 --112,024173,128 Galvanized Service Replacement 140,000 74,46865,532 ---- Corporation Yard Upgrade 15,000 7,979 7,021 ---- Le Point Area Main Upgrade 342,050 181,941160,109 ---- FixedBase - Variable Item 9.b. - Page 27 Page 19 Revenue requirements for monthly fixed charges include customer service costs,a portion of peaking costs, and fire protection through the servicing of public hydrants (private fire line connections have a separate monthly fixed charge schedule). Customer costs include such costs as meter reading, billing, collecting, and accounting. Meter service costs include maintenance and capital costs associated with meters and a portion of the capacity related costs. Proposition 218 requires a nexus between the rates and costs of providing service. To meet this requirement, RFC has conducted cost of service analysis and has identified two different rate components of the commodity rates which include delivery and peaking costs. DELIVERY COSTS Delivery costs, also commonly referred to as Base costs,are those operating and capital costs of the water system associated with delivering water to all customers at a constant average rate of use.Therefore, delivery costs are spread over all units of water, irrespective of customer classes or tiers,to calculate a uniform rate. EXTRA CAPACITY COSTS Extra capacity or peaking costs represent those costs incurred to meet customer peak demands for water in excess of a baseline usage. Total extra capacity costs are apportioned between maximum day and maximum hour demands based on the type of expense. The maximum day demand is the maximum amount of water used in a single day in a year. The maximum hour demand is the maximum usage in an hour on the maximum usage day.Different facilities are designed to meet different peaking characteristics.Therefore,extra capacity costs include capital improvements and power related costs, and have been apportioned between base,maximum day, and maximum hour.Costs allocated to base are part of the delivery costs as defined above. 2.2.4 Proposed Rate Structure FIXED CHARGES Customer service costs include customer-related and meter-related costs. Customer costs are uniform for all customers and include such costs as meter reading,billing, collecting and accounting, and fire protection for 840 public fire hydrants (reference is made to Appendix “C”for cost allocation between hydrant and private fire lines).Currently, the City’s fixed monthly water charge generates approximately 37% of total revenue and as part of the new rate structure;RFC maintained a similar percentage of revenue from the fixed monthly charge to maintain the current level of revenue stability (37% Fixed /63% Variable). Item 9.b. - Page 28 Page 20 Meter service costs include maintenance and capital costs associated with meters and a portion of the capacity related costs. RFC utilized the American Water Works Association meter service cost ratios in calculating the meter component of the fixed charge. These costs are assigned based on meter size.Based on these ratios, the City’s 6,340 accounts have a meter equivalency of 6,937.Table 2-8 shows the fixed charge separated between costs apportioned evenly over all units and meter equivalencies.Table 2-9 shows the proposed Fiscal Year 2014-15 monthly charge by meter size, and Table 2-10A shows the proposed five-year monthly service charges. The total proposed meter charge includes both the billing and customer service charge and the meter component charge.Table 2-10B shows the proposed five-year monthly service charges for Private Fire Lines by size of connection. Table 2-8: Fixed Charge Calculation –5/8” Meter Table 2-9: Proposed FYE 2015 Monthly Service Charges Customer Service Cost per UnitFYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Customer Service $747,887$753,222$770,962$789,139$807,763 Total Units 8,4238,4238,4238,4238,423 Customer Service per Unit $7.40$7.45$7.63$7.81$7.99 Meters and Services Cost Per MEFYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Meter & Services $1,027,856$1,035,188$1,059,569$1,084,550$1,110,147 Fire Protection (Public Hydrants)$628,373$632,856$647,761$663,033$678,681 Meter Service Equivalency 6,9266,9266,9266,9266,926 Meter & Services per ME $19.93$20.07$20.54$21.03$21.52 Base Fix Charge 5/8" Meter $27.33$27.52$28.17$28.83$29.51 Total Monthly Fixed Cost by Meter Size Meter Service Cost Ratio Account/Unit Charge Meter & Service Per ME FYE 2015 Current Fixed Charge Difference 5/8"1.00$7.40$19.93$27.33$26.08$1.25 3/4"1.10$7.40$21.92$29.32$26.08$3.24 1"1.40$7.40$27.90$35.30$36.06($0.76) 1 1/2"1.80$7.40$35.87$43.27$46.44($3.17) 2"2.90$7.40$57.79$65.19$59.83$5.36 3"11.00$7.40$219.20$226.60$101.21$125.39 4"14.00$7.40$278.98$286.38$122.26$164.12 6"21.00$7.40$418.47$425.87$168.21$257.66 8"29.00$7.40$577.89$585.29$219.40$365.89 Item 9.b. - Page 29 Page 21 Table 2-10A: Proposed Five-Year Monthly Service Charges Table 2-10B: Proposed Five-Year Monthly Private Fire Line Service Charges VARIABLE CHARGES Similar to the City’s current rate structure, approximately 63 percent of the City’s utility revenue requirements are proposed to be recovered from a variable charge, or based on the amount of water used. Variable costs include base and peaking.Base costs are apportioned over total applicable billable units regardless of customer class, which include costs such as water treatment services and chemicals.As such,base costs are divided by all units of water. Doing so derives a base cost per unit of water. Costs associated with peaking, which primarily includes capital improvements and power, are first apportioned to each defined customer class based on their total demand (total water used weighted by peak factor).Peaking was calculated for each customer class based on the consumption files,which ensures that accounts within each customer class will only recover the costs allocated to their respective customer class and no account is subsidizing any other account.Table 2-11 takes the variable costs for Fiscal Year 2014-15 associated with base costs to calculate a rate per unit of water and Table 2-12 shows Fiscal Year 2014-15 peak costs allocated between residential and non-residential customers.Table 2-13 is the sum of cost in Tables 2-11 and 2-12 for each distinct customer class. Total Monthly Fixed Cost by Meter Size FYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 5/8"$27.33$27.52$28.17$28.83$29.51 3/4"$29.32$29.53$30.22$30.94$31.67 1"$35.30$35.55$36.39$37.24$38.12 1 1/2"$43.27$43.58$44.60$45.65$46.73 2"$65.19$65.65$67.20$68.78$70.41 3"$226.60$228.21$233.59$239.10$244.74 4"$286.38$288.42$295.21$302.17$309.31 6"$425.87$428.91$439.01$449.36$459.96 8"$585.29$589.46$603.34$617.57$632.14 Private Fire Service Monthly Charge FYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 2"$3.47$3.49$3.57$3.66$3.74 3"$10.07$10.14$10.38$10.63$10.88 4"$21.46$21.61$22.12$22.64$23.18 6"$62.34$62.78$64.26$65.78$67.33 8"$132.85$133.79$136.94$140.17$143.48 10"$238.90$240.61$246.27$252.08$258.03 Item 9.b. - Page 30 Page 22 Table 2-11:Base Variable Cost–FYE 2015 Rate per Unit (ccf) Table 2-12: Allocation of Peak Costs between Customer Classes Table 2-13: Total Variable Costs by Customer Class Once base costs are calculated and peak costs are allocated to each customer class, the next step is to design the most equitable and appropriate rate structure to recover such costs from the corresponding customer class. Similar to the existing rate structure, the proposed variable rates for residential customers are tiered and,for non-residential customers the rate is uniform. RESIDENTIAL RATE STRUCTURE For residential customers, the variable charges (base and peaking) are further apportioned between three distinct tiers.The goal of the first tier is to provide for basic indoor water use; the second tier to provide for outdoor irrigation; and the third tier for excessive use or to encourage conservation.This is consistent with State laws regarding the highest and most efficient use of water.Tier 1 is calculated by the base winter quarter average, equal to approximately 75 gallons per day per capita (with a city density factor of 2.45), which is used as a proxy for determining indoor usage.However,based on the analysis of usage patterns and the fluctuations in usage during the winter quarter,RFC recommends that the allotment for Tier 1 be slighted adjusted from 12 to 18 CCF per SFR & MFR unit.Tier 2 is designed to account for an additional allotment for outdoor irrigation needs of 18 CCF per SFR unit and 9 CCF per MFR unit Customer Classes FYE 2015 Projected Annual Usage Percent of Usage FYE 2015 Base Cost FYE 2015 Base Cost (CCF) Residential 907,70578.55%$2,271,249 2.55$ Non-Residential142,53512.33%$356,650 2.55$ Irrigation 105,3629.12%$263,635 2.55$ 1,155,602100.00%$2,891,533 Customer Classes Peaking Factors Weighted Peak Factor Percentage of Peak FYE 2015 Max Day/Hour Costs Residential 1.503,74279.43%$958,440 Non-Residential 1.29 50310.67%$128,736 Irrigation 1.62 4679.90%$119,519 4,711100%$1,206,696 Customer Classes Base Variable Cost Max Day/Hour Costs Total Residential 2,271,249$958,440$3,229,689$ Non-Residential356,650$128,736$485,386$ Irrigation 263,635$119,519$383,154$ 2,891,533$1,206,696$4,098,229$ Item 9.b. - Page 31 Page 23 (which typically have less outdoor landscape area when compared to SFR).Therefore, in reviewing the consumption patterns and peak use during the summer quarter average, Tier 2 captures the average bi-monthly summer use of single family residential customers equal to approximately 32 CCF and approximately 24 CCF for a multi-family unit.Tier 3 captures any additional usage above the amount budgeted in Tiers 1 and 2. With these defined tiers and allotments, the functional variable costs are then applied to each tier. Similar to how maximum day and maximum hour costs were apportioned between customer classes, the total residential annualized variable costs (base &peak costs)in Fiscal Year 2014-15,equal to $3,229,689 for residential customers,are further apportioned between the defined tiers based on the peaking characteristics generated by customers within each tier, where Tier 1 is considered the base level (no peak; equal to 1.0). Table 2-14 calculate the rate per unit (CCF) of each Residential Tier for Fiscal Year 2014-15. Table 2-14: Residential Peak Costs by Tier RESIDENTIAL Description BaseMax Day Tier 1 Tier 2 Tier 3 Residential Base % Share 78.55%79.43%63.2%22.8%14.0% FYE 2015 Projected Consumption 562,009 203,007 124,535 Peaking Factor by Tier 1.00 1.44 3.01 Weighted Peak Factor 562,009 292,839 374,982 Peak % Share 46%24%30% TOTAL ALLOCATION 2,891,533$1,206,696$ Allocation to Residential 2,271,249958,440 1,872,939 746,547 610,203 Unit Cost 3.33$3.67$4.89$ Base - Variable Residential Tiers - Variable Item 9.b. - Page 32 Page 24 Table 2-15 and Table 2-16 show the proposed allotments and five-year residential tiered rates. Table 2-15: Proposed Allotments and Five-Year Single-Family Residential Tiered Rates ($/ccf) Table 2-16: Proposed Allotments and Five-Year Multi-Family Residential Unit Tiered Rates ($/ccf) NON-RESIDENTIAL RATE STRUCTURE For non-residential customers and irrigation customers,all variable charges including peak costs are summed to derive a uniform rate per CCF rather than a tiered rate structure. Customers other than residential vary considerably in size, use profile and needs, which makes it impractical and inequitable to place them in a “one size fits all” tiered rate structure without additional detailed data and analysis on type of business and related water demand for such business to determine appropriate allotments for efficient use.For example, a bookstore and a coffee shop exhibit drastically different water needs. However, despite not being tiered, the uniform rate structure is built on the same cost components, and the amount of Peak costs allocated to Non-residential and Irrigation is fully recovered by the customer class. Therefore, Non-Residential customers are paying their fair share of incurred costs.Table 2-18 identifies the rate per unit for Fiscal Year 2014-15 through Fiscal Year 2018-19. Table 2-18:Proposed Five-Year Non-Residential Rates ($/ccf) SFR Tiered RatesAllotmentFYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Tier 1 18 3.33$3.42$3.54$3.66$3.78$ Tier 2 36 3.67$3.76$3.90$4.03$4.16$ Tier 3 >36 4.89$5.02$5.19$5.37$5.55$ MFR Tiered Rates Allotment (Per Unit)FYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Tier 1 18 3.33$3.42$3.54$3.66$3.78$ Tier 2 9 3.67$3.76$3.90$4.03$4.16$ Tier 3 >27 4.89$5.02$5.19$5.37$5.55$ Non-ResidentialFYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Variable Costs $485,386$488,848$500,362$512,159$524,246 Consumption 139,684136,891135,522134,167132,825 Uniform Rate $3.47$3.57$3.69$3.82$3.95 IrrigationFYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Variable Costs $383,154$385,887$394,976$404,288$413,830 Consumption 103,255101,189100,17899,17698,184 Uniform Rate $3.71$3.81$3.94$4.08$4.21 Item 9.b. - Page 33 Page 25 2.2.5 Residential Rate Impacts Bill distribution and customer impact analyses reflect the City’s policies in terms of promoting the meeting of SB x7-7 targets and the principle of affordability for essential use.Figure 2-5 shows total usage by tier and number of bills that fall within such tier.Figure 2-6A shows the single-family customer impact of the new proposed rates versus current rates at 18 ccf for the next five-years and Figure 2-6B (on the following page) reflects a single-family residential customer at 31 ccf. Figure 2-5: Customer Usage and Bill Distribution Figure 2-6A:Single–Family Residential Customer Impacts @ 18 ccf $115.04 $114.59 $116.60 $120.06 $123.55 $127.07 $0 $20 $40 $60 $80 $100 $120 $140 Current 2015 2016 2017 2018 2019 Fixed Charge Commodity Charges Summary of Charges Current20152016201720182019 Fixed Charge 52.16$54.65$55.04$56.34$57.67$59.03$ Additional Unit Charge -$-$-$-$-$-$ Commodity Charges 62.88$59.94$61.56$63.72$65.88$68.04$ Total Charges 115.04$114.59$116.60$120.06$123.55$127.07$ $Change N/A (0.45)$2.01$3.46$3.49$3.52$ %Change N/A -0.4%1.8%3.0%2.9%2.8% Item 9.b. - Page 34 Page 26 Figure 2-7A: Single–Family Residential Customer Impacts @ 31 ccf $163.66 $162.30 $165.61 $170.76 $175.94 $181.28 $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 Current 2015 2016 2017 2018 2019 Fixed Charge Commodity Charges Summary of Charges Current20152016201720182019 Fixed Charge 52.16$54.65$55.04$56.34$57.67$59.03$ Additional Unit Charge -$-$-$-$-$-$ Commodity Charges 111.50$107.65$110.57$114.42$118.27$122.25$ Total Charges 163.66$162.30$165.61$170.76$175.94$181.28$ $Change N/A (1.36)$3.31$5.15$5.18$5.34$ %Change N/A -0.8%2.0%3.1%3.0%3.0% Item 9.b. - Page 35 Page 27 3 Wastewater System –Financial Plan 3.3 Financial Plan 3.3.1 Revenue Requirements A review of a utility’s revenue requirements is a key step in the rate design process. The review involves an analysis of annual operating revenues under the current rates, O&M expenses, capital expenditures, transfers between funds, and reserve requirements. This section of the report provides a discussion on projected revenues, O&M and capital expenditures, the capital improvement financing plan, debt service requirements, and revenue adjustments required to ensure the fiscal sustainability and solvency of the Wastewater Enterprise. 3.3.1.1 Revenues from Current Rates The current wastewater (WW) rate structure consists of monthly base service charges (by dwelling unit)for all customer classes and a discharge or commodity rate per hundred cubic feet (CCF).Current WW rates are shown in Tables 3-1 and 3-2. Table 3-1: Current WW Monthly Base Charges Description Effective 7/1/2013 Inside City $2.40 Outside City $3.00 Table 3-2: Current WW Volume Charges ($ / ccf) Description Effective 7/1/2013 Location Inside City Outside City SFR $0.67 $0.84 MFR $0.94 $1.18 Business $1.32 $1.65 Church $1.32 $1.65 School $1.32 $1.65 Hospital $1.32 $1.65 Motel $1.32 $1.65 Convalescent Home $1.32 $1.65 Other $1.32 $1.65 Table 3-3 provides a summary of WW EDUs for Fiscal Year 2013-14.Similar to the analysis in the Water Fund,a zero percent growth rate was assumed. Item 9.b. - Page 36 Page 28 Table 3-3: WW Accounts/Units Summary Accounts Summary FYE 2014 Single-Family Residential Customers 5,852 Multi-Family Residential –each unit 1,682 Business 596 Church 15 School 14 Hospital 83 Motel 300 Convalescent Home 183 Other 0 Total WW Customers 8,725 The WW revenues are derived from current rates and accounts, and are shown in Table 3-4. Table 3-4: WW Revenues FYE 2014 FYE 2015 FYE 2016 FYE 2017 FYE 2018 FYE 2019 Sewer Base Charges:$1,092,478 $1,092,478 $1,092,478 $1,092,478 $1,092,478 $1,092,478 3.3.1.2 O&M Expenses O&M expenses include the costs of operating and maintaining the wastewater collection as well as other administrative costs such as customer service and billing. The City’s Fiscal Year 2013-14 budget values and the assumed inflation factors for the study period (as sho wn in Table 2-1) were used as the basis for projecting O&M costs. Table 3-5 summarizes projected O&M expenses for the wastewater enterprise. The WW O&M expenses are projected to increase at approximately three percent per year. Table 3-5: Projected WW O&M Expenses FYE 2014 FYE 2015 FYE 2016 FYE 2017 FYE 2018 FYE 2019 Total Operating Expenditures:$960,280 $907,880 $922,137 $936,822 $951,947 $967,525 Item 9.b. - Page 37 Page 29 3.3.1.3 Capital Improvement Plan The City has adopted a long-term capital improvement plan (CIP) to address the WW Enterprise’s future needs. Table 4-5 shows the total expected CIP construction cost by year for the first five years of the ten-year study period. The figures are per the Sewer Master Plan and are adjusted for inflation. These projects will be funded through proposed rate revenues (PAYGO). There is no debt proposed to fund CIP for the WW enterprise. Table 3-6: WW CIP Adjusted For Inflation FYE 2014 FYE 2015 FYE 2016 FYE 2017 FYE 2018 FYE 2019 Total CIP Plan:$352,290 $190,500 $246,900 $201,512 $219,427 $562,000 3.3.1.4 Reserve Requirements To ensure fiscal sustainability and the continued operation of the WW enterprise, RFC recommends that the following reserve level targets be met. Operating Reserve –The operating reserve is used primarily to meet ongoing cash flow requirements.Given that a majority of the City’s wastewater revenue is through its discharge rates (75% of revenue),RFC recommends that the City increase its operating reserve target from 60 days to 90-days of O&M expenses.As the potential of revenue volatility increases, reserves should be set at an amount to offset this revenue reliability. A 90-day reserve ensures working capital to support the operation, maintenance and administration of the utility. Maintaining this level of reserves also provides liquid funds for the continued ongoing operations of the utility in the event of unforeseen costs or interruption with the utility or the bi-monthly billing system. Capital Reserve –Based on the relatively low expected cost of the City’s future CIP expenditure, RFC recommends that the City continues to maintain a target capital reserve level equal to 100 percent of the enterprise’s expected annual CIP expenses. 3.3.2 Financial Pro Forma at Current Rates Table 4-6 displays the pro forma of the WW Enterprise’s funds under current rates over the forecast period. All projections shown in the table are based on the current rate structure and do not include any rate adjustments or proceeds from additional debt issuances. Under this scenario, revenues generated from current rates and other miscellaneous revenues are sufficient to recover all operating expenses of the WW Enterprise.As a result,it is projected that the City will be able to maintain fiscal sustainability and solvency under their current Fiscal Year 2012-13 rates and;therefore,rate adjustments are not necessary at this point in time.As capital costs fluctuate from year-to-year, reserves are used when necessary. Item 9.b. - Page 38 Page 30 Table 3-7:Detailed Financial Plan Pro-forma at Current Rates 3.3.3 Recommendations and Proposed Financial Plan 3.3.3.1 Proposed Revenue Adjustments The WW Enterprise is currently financial solvent and it is recommended that the City maintain the current rate structure. The financial plan illustrates the Wastewater Enterprise will be financial solvent for the next five years and on;therefore no revenue adjustments are required. Figures 3-1,3-2,and 3-3 illustrate the projected five-year financial plan for the Wastewater Enterprise. Figure 3-1 illustrates the operating position of the Wastewater Enterprise, where the expenses,inclusive of reserve funding, are shown by stacked bars and total revenue at current rates is shown by the horizontal trend line. Figure 3-2 summarizes the projected CIP and its funding sources of 100%PAYGO.There is no debt shown because the proposed financial plan does not propose debt.The ending total fund balance for the WW utility –inclusive of both the operating and capital funds –is projected and shown in Figure 3-3, where the horizontal trend line indicates the target reserve balance as recommended by the reserve requirements discussed in Section 3.1.2. Revenue Adjustments from Rates FY 2014FY 2015FY 2016FY 2017FY 2018FY 2019FY 2020FY 2021FY 2022FY 2023 Revenues from Current Rates Budgeted Revenue $0 Service Charges$252,324$252,324$252,324$252,324$252,324$252,324$252,324$252,324$252,324$252,324 Discharge Charges$840,154$840,154$840,154$840,154$840,154$840,154$840,154$840,154$840,154$840,154 Total Revenues from Current Rates:$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478 Operating Fund Cash Flows Revenues Total Revenue from Rates$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478$1,092,478 Other Operating Revenues$16,000$16,000$16,000$16,000$16,000$16,000$16,000$16,000$16,000$16,000 Total Operating Revenues$1,108,478$1,108,478$1,108,478$1,108,478$1,108,478$1,108,478$1,108,478$1,108,478$1,108,478$1,108,478 Expenditures Total Operating Expenditures$276,380$285,580$294,122$302,921$311,982$321,315$330,928$340,828$351,024$361,526 Net Revenues Prior to Debt Payment $832,098$822,898$814,356$805,557$796,496$787,163$777,550$767,650$757,454$746,951 Non-Operating Expenditures Existing Debt Service$21,000$21,000$21,000$21,000$21,000$21,000$21,000$21,000$21,000$21,000 Proposed Debt Service $0 $0 $0 $0 $0 $0 $0 $0 $0$0 Total Non-Operating Expenditures$21,000$21,000$21,000$21,000$21,000$21,000$21,000$21,000$21,000$21,000 Net Revenues after Debt Payment $811,098$801,898$793,356$784,557$775,496$766,163$756,550$746,650$736,454$725,951 Operating Reserve Balances Beginning Balances$670,013$697,021$865,679$956,262$1,069,909$1,142,648$849,130$817,620$971,586$914,674 Transfer Out - Personnel($288,500)($293,840)($302,655)($311,735)($321,087)($330,720)($340,641)($350,860)($361,386)($372,228) Transfer Out - Operating($69,000)($72,500)($74,675)($76,915)($79,223)($81,599)($84,047)($86,569)($89,166)($91,841) Transfer Out - Cost Allocation($69,300)($71,400)($73,542)($75,748)($78,021)($80,361)($82,772)($85,255)($87,813)($90,447) Transfer Out - USDA City Hall Loan($5,000)($5,000)($5,000)($5,000)($5,000)($5,000)($5,000)($5,000)($5,000)($5,000) CIP Expenditures($352,290)($190,500)($246,900)($201,512)($219,427)($562,000)($275,600)($65,000)($250,000)($55,000) Net Income (Loss) after Transfers$27,008$168,658$90,583$113,647$72,738($293,517)($31,510)$153,966($56,911)$111,436 Ending Balances$697,021$865,679$956,262$1,069,909$1,142,648$849,130$817,620$971,586$914,674$1,026,110 Target Balances (% of Operating Expenditure plus CIP)$675,795$680,830$686,249$691,830$697,578$703,499$709,597$715,878$722,347$729,011 Debt CoverageN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A Item 9.b. - Page 39 Page 31 Figure 3-1: Five-Year WW Operating Financial Plan Figure 3-2: Projected CIP and Funding Sources for WW Funds Figure 3-3: Projected Ending Balances for WW Funds Item 9.b. - Page 40 Page 32 3.4 Proposed WW Rates As a part of this study, RFC developed the proposed financial plan which illustrates that the Wastewater Enterprise is currently and will remain financial solvent for the next five years as shown in in Figures 3-1 and 3-3.Although capital costs in Fiscal Year 2018-19 exceed the annual revenue, the enterprise has adequate reserves to fund the necessary capital and is replenished in subsequent years.As such, a Proposition 218 noticing is not required for the City’s Wastewater Enterprise as the current rates provide sufficient funding for costs incurred and reserves. Item 9.b. - Page 41 Page 33 EXHIBIT “A”–SINGLE-FAMILY RESIDENTIAL WATER RATE COMPARISON *The bi-monthly comparison is based on the City’s annual bi-monthly average equal to 31 ccf. Item 9.b. - Page 42 Page 34 EXHIBIT “B”–RESIDENTIAL WASTEWATER RATE COMPARISON * For variable component, 15 CCF was assumed for comparison. Item 9.b. - Page 43 Page 35 Appendix “A”–Detailed Financial Plan Pro-forma at Current Rates Revenue Adjustments from Rates FY 2014FY 2015FY 2016FY 2017FY 2018FY 2019FY 2020FY 2021FY 2022FY 2023 Revenues from Current Rates Service Charges$462,505$462,505$462,505$462,505$462,505$462,505$462,505$462,505$462,505$462,505 Service Charges - Fire Lines$16,984$16,984$16,984$16,984$16,984$16,984$16,984$16,984$16,984$16,984 Calcuated Lopez Base Meter Charge$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354 Calculater Lopez Addtl. Unit Charge$284,917$284,917$284,917$284,917$284,917$284,917$284,917$284,917$284,917$284,917 Volume Charges$4,182,070$4,098,428$4,016,460$3,976,295$3,936,532$3,897,167$3,858,195$3,819,613$3,781,417$3,743,603 Total Revenues from Current Rates:$6,581,829$6,498,188$6,416,220$6,376,055$6,336,292$6,296,927$6,257,955$6,219,373$6,181,177$6,143,363 640 - Operating Fund Cash Flows Revenues Total Revenue from Rates$6,581,829$6,498,188$6,416,220$6,376,055$6,336,292$6,296,927$6,257,955$6,219,373$6,181,177$6,143,363 Other Operating Revenues$83,600$83,600$83,600$83,600$83,600$83,600$83,600$83,600$83,600$83,600 Total Operating Revenues$6,665,429$6,581,788$6,499,820$6,459,655$6,419,892$6,380,527$6,341,555$6,302,973$6,264,777$6,226,963 Expenditures Salaries & Ben - Admin.$122,395$221,067$227,699$234,530$241,566$248,813$256,277$263,965$271,884$280,041 Salaries & Ben - Prod.$100,970$103,999$107,119$110,333$113,643$117,052$120,563$124,180$127,906$131,743 Salaries & Ben - Distr.$315,660$325,130$334,884$344,930$355,278$365,936$376,915$388,222$399,869$411,865 Supplies & Maint.$742,750$819,334$848,427$878,613$909,937$942,443$976,181$1,011,198$1,047,547$1,085,282 Total Operating Expenditures$1,281,775$1,469,530$1,518,128$1,568,406$1,620,423$1,674,245$1,729,936$1,787,566$1,847,206$1,908,930 Total Non-Operating Expenditures $8,800$8,800$8,800$8,800$8,800$8,800$8,800$8,800$8,800$8,800 Net Revenues after Debt Payment$5,374,854$5,103,458$4,972,891$4,882,449$4,790,669$4,697,482$4,602,819$4,506,607$4,408,771$4,309,232 Operating Reserve Balances Beginning Balances$3,079,998$5,526,852$8,077,741$10,171,799$12,512,359$14,519,108$16,501,684$18,126,072$19,820,947$21,329,177 Direct Personnel Transfers($508,400)($568,770)($585,833)($603,408)($621,510)($640,156)($659,360)($679,141)($699,515)($720,501) Direct Operating Transfers($231,800)($231,000)($237,930)($245,068)($252,420)($259,993)($267,792)($275,826)($284,101)($292,624) Cost Allocation Transfers($316,900)($359,000)($369,770)($380,863)($392,289)($404,058)($416,179)($428,665)($441,525)($454,770) Transfer Out - Lopez Fund($973,500)($973,500)($973,500)($973,500)($973,500)($973,500)($973,500)($973,500)($973,500)($973,500) Transfers out - CIP Fund($397,400)($420,300)($711,800)($339,050)($544,200)($437,200)($661,600)($454,600)($501,900)($603,700) Ending Balances$6,026,852$8,077,741$10,171,799$12,512,359$14,519,108$16,501,684$18,126,072$19,820,947$21,329,177$22,593,314 Appropriation for Capital($500,000)$0 $0 $0 $0 $0 $0 $0 $0 $0 Ending Balance Fund 640$5,526,852$8,077,741$10,171,799$12,512,359$14,519,108$16,501,684$18,126,072$19,820,947$21,329,177$22,593,314 Target Balances$1,115,710$1,196,185$1,224,898$1,264,248$1,297,220$1,337,439$1,378,928$1,421,729$1,465,884$1,511,437 641 - Lopez Fund Revenues Transfer In - 640 Fund (30% of Obligation)$973,500$973,500$973,500$973,500$973,500$973,500$973,500$973,500$973,500$973,500 OB Late Payment Penalty$20,500$20,500$20,500$20,500$20,500$20,500$20,500$20,500$20,500$20,500 Interest $8,500$8,500$8,500$8,500$8,500$8,500$8,500$8,500$8,500$8,500 Total Operating Revenues$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500 Operating Expenditures Lopez Maintenance & Operations - Routine$1,482,923$1,512,581$1,542,833$1,573,690$1,605,164$1,653,319$1,702,918$1,754,006$1,806,626$1,860,825 Lopez Maintenance & Operations - Non-Routine $67,086$68,428$69,796$71,192$72,616$74,794$77,038$79,349$81,730$84,182 Lopez Maintenance & Operations- Pigging$61,419$58,725$183,043 $0 $0 $0 $0 $0 $0 $0 Lopez Maintenance & Operations- Capital Overlay$204,735$199,673$65,715$278,025$278,025$286,366$294,957$303,805$312,920$322,307 Lopez Cost Allocation Transfer$307,800$317,034$326,545$336,341$346,432$356,825$367,529$378,555$389,912$401,609 Total Operating Expenditures$2,123,963$2,156,441$2,187,932$2,259,248$2,302,237$2,371,304$2,442,443$2,515,716$2,591,188$2,668,923 Non-Operating Expenditures Lopez Debt Service$498,827$498,827$498,827$498,827$498,827$498,827$498,827$498,827$498,827$498,827 SRF Debt Service$929,829$929,829$929,829$929,829$929,829$929,829$929,829$929,829$929,829$929,829 Lopez Bad Debt Expense $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Total Non-Operating Expenditures$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656 TOTAL REVENUES (FUND 640 and 641)6,694,429$6,610,788$6,528,820$6,488,655$6,448,892$6,409,527$6,370,555$6,331,973$6,293,777$6,255,963$ TOTAL EXPENDITURES (FUND 640 and 641)(4,869,038)$(5,213,841)$(5,620,193)$(5,404,843)$(5,741,879)$(5,795,754)$(6,186,111)$(6,150,314)$(6,374,235)$(6,658,249)$ Net Revenue for Debt Coverage Calculation1,825,391$1,396,947$908,626$1,083,812$707,013$613,773$184,444$181,659$(80,458)$(402,286)$ Debt Coverage for COPs 366%280%182%217%142%123%37%36%-16%-81% Water Enterprise Fund Total Water Enterprise Ending Fund Balance6,263,866$6,232,158$5,712,128$5,367,283$4,645,640$3,830,757$2,586,545$1,339,548$(169,566)$(2,000,508)$ Total Water Enterprise Reserve Target3,044,366$3,124,841$3,153,554$3,192,904$3,225,876$3,266,095$3,307,584$3,350,385$3,394,540$3,440,093$ Alert - Revenues < Desired TargetN/A N/AN/AN/AN/AN/A(721,039)$(2,010,836)$(3,564,105)$(5,440,601)$ Item 9.b. - Page 44 Page 36 Appendix “B”-Detailed Financial Plan Pro-forma at Proposed Rates [1]The ten-year pro forma also reflects 3% revenue adjustments from FY 2019-20 through FY 2022-23 Revenue Adjustments from Rates FY 2014FY 2015FY 2016FY 2017FY 2018FY 2019FY 2020FY 2021FY 2022FY 2023 Revenues from Current Rates Service Charges$462,505$462,505$462,505$462,505$462,505$462,505$462,505$462,505$462,505$462,505 Service Charges - Fire Lines$16,984$16,984$16,984$16,984$16,984$16,984$16,984$16,984$16,984$16,984 Calcuated Lopez Base Meter Charge$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354$1,635,354 Calculater Lopez Addtl. Unit Charge$284,917$284,917$284,917$284,917$284,917$284,917$284,917$284,917$284,917$284,917 Volume Charges$4,182,070$4,098,428$4,016,460$3,976,295$3,936,532$3,897,167$3,858,195$3,819,613$3,781,417$3,743,603 Total Revenues from Current Rates:$6,581,829$6,498,188$6,416,220$6,376,055$6,336,292$6,296,927$6,257,955$6,219,373$6,181,177$6,143,363 640 - Operating Fund Cash Flows Revenues Total Revenue from Rates$6,581,829$6,563,170$6,609,989$6,765,670$6,925,182$7,088,623$7,256,094$7,427,699$7,603,544$7,783,739 Other Operating Revenues$83,600$83,600$83,600$83,600$83,600$83,600$83,600$83,600$83,600$83,600 Total Operating Revenues$6,665,429$6,646,770$6,693,589$6,849,270$7,008,782$7,172,223$7,339,694$7,511,299$7,687,144$7,867,339 Expenditures Salaries & Ben - Admin.$122,395$221,067$227,699$234,530$241,566$248,813$256,277$263,965$271,884$280,041 Salaries & Ben - Prod.$100,970$103,999$107,119$110,333$113,643$117,052$120,563$124,180$127,906$131,743 Salaries & Ben - Distr.$315,660$325,130$334,884$344,930$355,278$365,936$376,915$388,222$399,869$411,865 Supplies & Maint.$742,750$819,334$848,427$878,613$909,937$942,443$976,181$1,011,198$1,047,547$1,085,282 Total Operating Expenditures$1,281,775$1,469,530$1,518,128$1,568,406$1,620,423$1,674,245$1,729,936$1,787,566$1,847,206$1,908,930 Total Non-Operating Expenditures $8,800$8,800$8,800$8,800$8,800$8,800$8,800$8,800$8,800$8,800 Net Revenues after Debt Payment$5,374,854$5,168,440$5,166,661$5,272,064$5,379,559$5,489,178$5,600,958$5,714,933$5,831,138$5,949,609 Operating Reserve Balances Beginning Balances$3,079,998$5,526,852$8,142,722$10,430,550$13,160,726$15,756,365$18,530,637$21,153,163$24,056,364$26,986,961 Direct Personnel Transfers($508,400)($568,770)($585,833)($603,408)($621,510)($640,156)($659,360)($679,141)($699,515)($720,501) Direct Operating Transfers($231,800)($231,000)($237,930)($245,068)($252,420)($259,993)($267,792)($275,826)($284,101)($292,624) Cost Allocation Transfers($316,900)($359,000)($369,770)($380,863)($392,289)($404,058)($416,179)($428,665)($441,525)($454,770) Transfer Out - Lopez Fund($973,500)($973,500)($973,500)($973,500)($973,500)($973,500)($973,500)($973,500)($973,500)($973,500) Transfers out - CIP Fund($397,400)($420,300)($711,800)($339,050)($544,200)($437,200)($661,600)($454,600)($501,900)($603,700) Ending Balances$6,026,852$8,142,722$10,430,550$13,160,726$15,756,365$18,530,637$21,153,163$24,056,364$26,986,961$29,891,474 Appropriation for Capital($500,000)$0 $0 $0 $0 $0 $0 $0 $0 $0 Ending Balance Fund 640$5,526,852$8,142,722$10,430,550$13,160,726$15,756,365$18,530,637$21,153,163$24,056,364$26,986,961$29,891,474 Target Balances$1,115,710$1,196,185$1,224,898$1,264,248$1,297,220$1,337,439$1,378,928$1,421,729$1,465,884$1,511,437 641 - Lopez Fund Revenues Transfer In - 640 Fund (30% of Obligation)$973,500$973,500$973,500$973,500$973,500$973,500$973,500$973,500$973,500$973,500 OB Late Payment Penalty$20,500$20,500$20,500$20,500$20,500$20,500$20,500$20,500$20,500$20,500 Interest $8,500$8,500$8,500$8,500$8,500$8,500$8,500$8,500$8,500$8,500 Total Operating Revenues$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500$1,002,500 Operating Expenditures Lopez Maintenance & Operations - Routine$1,482,923$1,512,581$1,542,833$1,573,690$1,605,164$1,653,319$1,702,918$1,754,006$1,806,626$1,860,825 Lopez Maintenance & Operations - Non-Routine $67,086$68,428$69,796$71,192$72,616$74,794$77,038$79,349$81,730$84,182 Lopez Maintenance & Operations- Pigging$61,419$58,725$183,043 $0 $0 $0 $0 $0 $0 $0 Lopez Maintenance & Operations- Capital Overlay$204,735$199,673$65,715$278,025$278,025$286,366$294,957$303,805$312,920$322,307 Lopez Cost Allocation Transfer$307,800$317,034$326,545$336,341$346,432$356,825$367,529$378,555$389,912$401,609 Total Operating Expenditures$2,123,963$2,156,441$2,187,932$2,259,248$2,302,237$2,371,304$2,442,443$2,515,716$2,591,188$2,668,923 Non-Operating Expenditures Lopez Debt Service$498,827$498,827$498,827$498,827$498,827$498,827$498,827$498,827$498,827$498,827 SRF Debt Service$929,829$929,829$929,829$929,829$929,829$929,829$929,829$929,829$929,829$929,829 Lopez Bad Debt Expense $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Total Non-Operating Expenditures$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656$1,428,656 TOTAL REVENUES (FUND 640 and 641)6,694,429$6,675,770$6,722,589$6,878,270$7,037,782$7,201,223$7,368,694$7,540,299$7,716,144$7,896,339$ TOTAL EXPENDITURES (FUND 640 and 641)(4,869,038)$(5,213,841)$(5,620,193)$(5,404,843)$(5,741,879)$(5,795,754)$(6,186,111)$(6,150,314)$(6,374,235)$(6,658,249)$ Net Revenue for Debt Coverage Calculation1,825,391$1,461,929$1,102,396$1,473,427$1,295,903$1,405,468$1,182,583$1,389,985$1,341,910$1,238,091$ Debt Coverage for COPs 366%293%221%295%260%282%237%279%269%248% Water Enterprise Fund Total Water Enterprise Ending Fund Balance6,263,866$6,297,139$5,970,879$6,015,650$5,882,897$5,859,709$5,613,636$5,574,965$5,488,218$5,297,653$ Total Water Enterprise Reserve Target3,044,366$3,124,841$3,153,554$3,192,904$3,225,876$3,266,095$3,307,584$3,350,385$3,394,540$3,440,093$ Alert - Revenues < Desired TargetN/A N/AN/AN/AN/AN/AN/AN/AN/AN/A Item 9.b. - Page 45 Page 37 Appendix “C”-Public Hydrant / Private Fire Line Cost Allocation Connection Size Demand Factor (^2.63)Unit Counts Fire Equivalent Conenctions Percent Allocation Fire Protection Costs FYE 2015 Cost $689,199 Public Hydrants 91.17%$628,373 6"111.31 84093,501 Private Lines 8.83%$60,825 2"6.19 6 37 3"17.98 1 18 4"38.32 542,069 6"111.31 525,788 8"237.21 3 712 10"426.58 1 427 Total 102,552100.00%$689,199 Item 9.b. - Page 46 Page 38 EXHIBIT “D”–WATER RATE SUMMARY Proposed Five-Year Monthly Service Charges Proposed Five-Year Monthly Private Fire Line Service Charges Proposed Bi-Monthly Allotments and Five-Year Single-Family Residential Tiered Rates ($/ccf) Proposed Bi-Monthly Allotments and Five-Year Multi-Family Residential Unit Tiered Rates ($/ccf) Proposed Five-Year Non-Residential Rates ($/ccf)[1] [1]Hydrant Rate includes all costs as a uniform variable rate and the Wheeling Rate excludes Lopez charges Total Monthly Fixed Cost by Meter Size FYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 5/8"$27.33$27.52$28.17$28.83$29.51 3/4"$29.32$29.53$30.22$30.94$31.67 1"$35.30$35.55$36.39$37.24$38.12 1 1/2"$43.27$43.58$44.60$45.65$46.73 2"$65.19$65.65$67.20$68.78$70.41 3"$226.60$228.21$233.59$239.10$244.74 4"$286.38$288.42$295.21$302.17$309.31 6"$425.87$428.91$439.01$449.36$459.96 8"$585.29$589.46$603.34$617.57$632.14 Private Fire Service Monthly Charge FYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 2"$3.47$3.49$3.57$3.66$3.74 3"$10.07$10.14$10.38$10.63$10.88 4"$21.46$21.61$22.12$22.64$23.18 6"$62.34$62.78$64.26$65.78$67.33 8"$132.85$133.79$136.94$140.17$143.48 10"$238.90$240.61$246.27$252.08$258.03 SFR Tiered RatesAllotmentFYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Tier 1 18 3.33$3.42$3.54$3.66$3.78$ Tier 2 36 3.67$3.76$3.90$4.03$4.16$ Tier 3 >36 4.89$5.02$5.19$5.37$5.55$ MFR Tiered Rates Allotment (Per Unit)FYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Tier 1 18 3.33$3.42$3.54$3.66$3.78$ Tier 2 9 3.67$3.76$3.90$4.03$4.16$ Tier 3 >27 4.89$5.02$5.19$5.37$5.55$ Non-ResidentialFYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Uniform Rate $3.47$3.57$3.69$3.82$3.95 IrrigationFYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Uniform Rate $3.71$3.81$3.94$4.08$4.21 Hydrant RateFYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Total Costs $6,563,170$6,609,989$6,765,670$6,925,182$7,088,623 Consumption 1,155,6021,155,6021,155,6021,155,6021,155,602 Uniform Rate $5.68$5.72$5.85$5.99$6.13 Wheeling RateFYE 2015FYE 2016FYE 2017FYE 2018FYE 2019 Variable Costs$2,187,388$2,202,992$2,254,878$2,308,040$2,362,512 Consumption 1,155,6021,155,6021,155,6021,155,6021,155,602 Uniform Rate $1.89$1.91$1.95$2.00$2.04 Item 9.b. - 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