WATER VALIDATION, COST OF SERVICE & RATE DESIGN ANALYSIS WASTEWATER VALIDATION & RATE ANALYSIS MISCELLANEOUS FEES & OVERHEAD RATE ANALYSIS

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1 WATER VALIDATION, COST OF SERVICE & RATE DESIGN ANALYSIS WASTEWATER VALIDATION & RATE ANALYSIS MISCELLANEOUS FEES & OVERHEAD RATE ANALYSIS B&V PROJECT NO PREPARED FOR Vallecitos Water District, CA AUGUST 14, 2013 Black & Veatch Holding Company All rights reserved.

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3 Vallecitos Water District, CA Water, Wastewater & Fee Study Table of Contents 1 Executive Summary Background Scope of Work Study Recommendations and Comments Wastewater Cost of Service and Rate Design Water Cost of Service and Rate Design Water and Wastewater Proposed Rate Levels District Staff Labor Overhead Rate District Miscellaneous Fees and Charges Allocation of Administrative Costs between Water and Wastewater Funds Reserve Policies Water and Wastewater Financial Modeling Disclaimer Water Financial Validation and Cost of Service Study Customer Projections Revenue and Revenue Requirements Projected Operating Fund Results Projected Capacity Fund Results Test Year Revenue Requirements Water Cost of Service Allocation Functional Cost Components Allocation to Cost Components Allocation of Operating and Maintenance Expense Allocation of Capital Investments Units of Service Cost of Service Allocations Units Costs of Service Distribution of Costs of Service to Customer Classes Adequacy of Existing Rates to Meet Costs of Service Proposed Water Rate Adjustments Proposed Rates Readiness to Serve Charge (RTS) Commodity Charge Pumping Charge Wastewater Validation Study Description of A Wastewater Cost of Service Process BLACK & VEATCH CORPORATION Table of Contents i

4 Water, Wastewater & Fee Study Vallecitos Water District, CA 5.2 Recommendations Customer Classes Customer Flow and Strengths Plant Flow and Strengths Meadowlark Plant Capital Projects Alternative Rate Structures FY 12/13 To FY 15/16 Wastewater Rates Miscellaneous Fees and Overhead Rate Analysis Overhead Rate Analysis Miscellaneous Fee Analysis Appendix ii B&V PROJECT NO SEPTEMBER 3, 2013

5 Vallecitos Water District, CA Water, Wastewater & Fee Study 1 Executive Summary This report is prepared for the Vallecitos Water District (District) to document the findings and recommendations of a cost of service analysis for the District s Water and Wastewater Funds as conducted by Black & Veatch Corporation (Black & Veatch). In addition, this report summarizes Black & Veatch s verification review of the District s water and wastewater rate models. The District s rate models were developed by District staff and Black & Veatch s engagement represents the first time that the District has sought outside assistance regarding its models. Finally, this report contains Black & Veatch s analysis and recommendation pertaining to the District s miscellaneous fee schedule and overhead costs. 1.1 BACKGROUND The District provides water, wastewater and reclamation services to the City of San Marcos, the community of Lake San Marcos, parts of the cities of Carlsbad, Escondido, and Vista, and unincorporated areas of the County of San Diego. The District was formed in 1955 as a County (water-only) special district by a group of local citizens as a response to the shrinking water table in the San Marcos and Twin Oaks Valleys (originally formed as the San Marcos County Water District). The District currently serves a population of approximately 94,000 with 21,000 water and 20,200 sewer connections within a 45 square mile boundary in northern San Diego County. The District, largely residential, is one of the only growth areas remaining in San Diego County, with water boundaries 65 percent built out, and sewer boundaries 60 percent built out. From 2000 through 2005, the annual growth rate (in meter connections) averaged 6.0 percent. From 2008 through 2012, the annual growth rate averaged 0.6 percent. The District is now experiencing heightened development activity, although not expected to return to a 6 percent growth rate. The District has million gallons of operational water storage, 5 million gallons per day (MGD) of liquid sewer treatment capacity at the Meadowlark Reclamation Facility, 7.54 MGD liquid and 10.5 MGD solids treatment capacity at the Encina Wastewater Authority (EWA), a jointlyowned facility representing six member agencies. The District imports about 17,000 acre-feet per year (AFY) of treated water from the San Diego County Water Authority (CWA), its sole supply source. The District currently averages 6.7 MGD of sewer flow. Water rates are primarily composed of two components a ready-to-serve (fixed) monthly charge and a consumption (per unit, or 100 cubic feet) charge. The consumption charge is structured with 3 tiers with tier limits varying by meter size. Tier premiums recover costs associated with limited supply (resources expended to comply with SBx7-7, to accommodate peaking, conservation, and outreach, and water supply reliability and diversification). The District charges residential sewer accounts based on a flat monthly charge. Commercial sewer charges are based on flow. All utility-related charges are billed monthly with the exception of customers receiving sewer service only from the District being billed through the County s property tax roll. The District contracted with CWA for a purchase commitment of 3,500 AF of desalinated water from the desalination plant in Carlsbad. The District is pursuing a direct connection to avoid wheeling charges and receive the 3,500 AF before blending with other imported water at CWA s Twin Oaks Treatment plant. Deliveries of desalinated water are anticipated to start in BLACK & VEATCH CORPORATION Table of Contents 3

6 Water, Wastewater & Fee Study Vallecitos Water District, CA In December of 2012, the District contracted with the Olivenhain Municipal Water District (OMWD) for a minimum of 2,750 AF of treated water deliveries from the Olivenhain Dam starting in The District will replace the treated water on the CWA invoice with raw deliveries equal to the amount delivered from OMWD (an exchange with OMWD). The District will pay OMWD for treatment services at a per-acre-foot rate discounted from CWA s treatment rate and recover costs of constructing a pumping station from a capital recovery credit on OMWD s invoice for treatment services. 1.2 SCOPE OF WORK This report is prepared for the District to document Black and Veatch s findings and recommendations. The major goals of the study are to: Incorporate the District s water and wastewater financial plan for Fiscal Years (FY) 13/14 to 2017/18 covering ongoing operations, capital improvements, and reserves. Allocate the water and wastewater projected FY 13/14,FY 14/15, and FY 15/16 revenue requirements to the various customer classes in accordance with the respective service requirements. Develop a cost of service rate schedule that produces revenues adequate to meet financial needs while recognizing customer costs of service and local and state legal and policy considerations such as Articles XIII C and D of the California Constitution (Proposition 218). Develop a District staff labor overhead rate. Conduct a user fee analysis of the District s miscellaneous fees and charges and develop a related, comprehensive fee schedule. Develop a suitable water rate schedule that produces revenues adequate to meet financial needs, recognizes customer costs of service, and encourages water conservation in a resource-constricted environment. Recommend a wastewater rate schedule that produces revenues adequate to meet financial needs and recognizes customer costs of services under the District s current methodology. The study was conducted in accordance with state law, industry standards, and the State Water Resource Control Board (SWRCB) Revenue Program Guidelines. 1.3 STUDY RECOMMENDATIONS AND COMMENTS There are many elements to this project, ranging from financial modeling validation to cost of service analyses to user fee development. Our recommendations and comments below are separated into these different elements for ease of reading and understanding Wastewater Cost of Service and Rate Design 1. Black & Veatch recommends that the District consider basing Cost of Service (COS) allocations on a Functional Cost Allocation methodology, utilizing flow and sewer effluent patterns typically exhibited by each customer category. 2. Black & Veatch recommends the District implement a program to monitor pollutant loading streams as well as use wastewater flow and effluent guidelines issued by the SWRCB. Flow and loading data could also be derived from larger California agencies such 4 B&V PROJECT NO SEPTEMBER 3, 2013

7 Vallecitos Water District, CA Water, Wastewater & Fee Study as Los Angeles County Sanitation District and the City of San Diego. Furthermore, Black & Veatch recommends that the District phase-in this methodology for cost allocation and rate design over the next three fiscal years. 3. Currently, the District charges residential customers a flat rate based on effluent flow. Multi-family Residential (MFR) is 90% of Single-family Residential (SFR) and Mobile Homes (MH) at 80% of SFR. The District has a couple of options concerning a modified sewer rate and is dependent on knowing the water volume consumed. o o Fixed with Winter Average Usage. Fixed with Volumetric with a Return Factor. 4. Black & Veatch discussed modifying the current Residential categories with District staff. The modification involves incorporating dwelling densities on a per acre basis into the flat rate. Using the density approach, the current SFR, MFR and MH categories would translate to the Low-, Medium-, and High-density categories. Based on a review of the available data, Black & Veatch suggests that the District consider the following : o o First, given the accelerated schedule of this year s COS study to meet upcoming Public Hearing scheduling requirements, there is not enough time to go through District account records to match accounts to zoning density categories per the master plan documents. For the most part, industrial data on pollutant loading factors for residential customers treats all subclasses (SFR, MFR) in the same manner. In other words, a higher dwelling density does not necessarily translate into higher sewer loadings. Under the current wastewater rate approach, current sewer charges for residential subclasses associated with a dwelling unit make distinctions based on flow per unit. There is a logical nexus under the current rates, however Black & Veatch suggests that effluent strength be included in future cost analyses along with flow. In order to justify a higher charge for higher density customers, Black & Veatch suggests that a small metering and sampling exercise would be beneficial. Over several months, District staff could take samples from a number of higher density customers to measure effluent loadings. If these loadings are materially higher than those of the single family residential customer, then a nexus for a higher charge exists. 5. In the event that the District wishes to add a strength element to its charges, Black & Veatch suggests that further subcategories may be needed under the Commercial class. For example, strength loadings for commercial laundries, hospitals and bakeries should be identified (all of these facilities have higher strength factors). In addition, the District will need to also develop a policy regarding multi-use areas (e.g., strip malls) that are not sub-metered. As a suggestion, for strip malls, the assigned loading factors could be based on the business with the highest factors. 6. Black & Veatch recommends the District incorporate an Infiltration/Inflow (I/I) component to the cost allocation analysis within the wastewater model. While I/I may not be a large issue within the District, during storm events it does add to the volume being collected and sent to EWA for treatment. As such, I/I creates an extra cost burden on the District. 7. District staff asked Black & Veatch to consider using peaking factors to develop the sewer cost of service methodology. Because sewer does not peak in the same way as water BLACK & VEATCH CORPORATION Table of Contents 5

8 Water, Wastewater & Fee Study Vallecitos Water District, CA demand, very few agencies consider this factor in their COS models and rate design. If a sewer system does have any peaking issues, it would be due to storm events via I/I. As noted in the comment above, incorporating an I/I component into the cost allocation helps to address the additional cost burden I/I poses to the system. The allocation of I/I volume is allocated to customer classes based on volume and number of connections to the system. 8. Black & Veatch recommends that the District eliminate the frugal discount program beginning FY 13/14 or if it chooses to maintain the program, fund the discount through other sources than customer rates. Removing the frugal discount or funding the program through other means will help ensure the District wastewater rate structure is in compliance with Article XIII D of the California Constitution (Proposition 218) Water Cost of Service and Rate Design 1. Black & Veatch suggests that the District consider basing cost of service allocations using the Base-Extra Capacity methodology, which is an industry-standard approach across the country for setting water rates. This approach demonstrates a reasonable nexus between customer demand and the cost of providing water service to each customer class. 2. The District charges water customers a Readiness-to-Service (RTS) charge based on meter size. Generally, fixed-cost elements of the water system are associated with the RTS charge. For example, the District allocates fixed wholesale water purchase costs to the RTS. The practice of charging a RTS is widely used in the utility industry. Larger meters receive a larger proportion of the fixed costs for a variety of reasons including flow capacity ability and system investment costs. The District currently uses flow ratings for each meter size to determine the factors that distinguish RTS charges from meter-size to meter-size. Customers with 5/8 inch meters are assigned a lower RTS charge than do ¾ inch meters. However, since this practice was first established, flow ratings have changed significantly and the emphasis for establishing rates has shifted more to a nexus of costs. Black & Veatch recommends that the District treat 5/8 inch and ¾ inch meters as the same meter size class for purpose of the cost of service analysis. To minimize rate impact and still meet revenue requirements, a five-year phase-in from current ratios utilized to the proposed ratios is recommended. Black & Veatch recommends that the District continue allocating a percentage of their wholesale water purchase costs to the RTS since the District has a very limited ability to buy treated water from any other source. Excluding the fixed charges and fixed commodity-based charges from CWA, Black & Veatch recommends placing a portion of the pass-through costs on the RTS. For example, the amount that would stay on the RTS could be equal to the minimum level of water the District s customers need. There may be surpluses or deficiencies that are carried forward each year. Black & Veatch agrees with this practice assuming the pass-through adjustment is made annually. Assuming a surplus in a given year, Black & Veatch recommends the District designate how it will use this money. For example, a percentage of the surplus could be directed toward the Rate Stabilization Fund. Everything in excess of this amount could then go to the commodity charge. 6 B&V PROJECT NO SEPTEMBER 3, 2013

9 Vallecitos Water District, CA Water, Wastewater & Fee Study 3. On November 21, 2012, the District Board of Directors voted to enter into a water purchase agreement with wholesaler CWA to purchase 3,500 AF of desalinated water; this amount would represent approximately 20 percent of the District s current annual water consumption pattern. Deliveries are anticipated to begin in calendar year Melding of desalinated water with the current District water supply will provide supply reliability for District customers. Based on CWA s estimates, the 2012 cost of desalinated water is approximately $2,250 per acre-foot. CWA will embark on a COS study to derive a rate structure to incorporate the desalination water costs into its cost structure. Preliminary options provided by CWA indicate that if the District were to not have a separate contract with CWA, then the impact to the District will be in the range of $1.5M to $3.5M above CY 2012 CWA charges. Black & Veatch believes that the District s current water budget projection model reasonably anticipates the CWA melded supply cost per acre foot. The projected figure translates to about a 15 percent to 20 percent increase in the District s water supply costs. Black & Veatch estimates that the net effect on water revenue requirements will be about 10 percent to 15 percent in FY 16/17. Black & Veatch recommends that the District increase the balance in the Rate Stabilization Reserve fund over the next two years to help mitigate significant customer rate increases in FY 16/17 and beyond. 4. Black & Veatch recommends that the District eliminate the frugal discount program beginning FY 13/14 or if it chooses to maintain the program, fund the discount through other sources than customer rates. Removing the frugal discount or funding the program through other means will help ensure the District water rate structure is in compliance with Article XIII D of the California Constitution (Proposition 218) Water and Wastewater Proposed Rate Levels In examining the necessary rate adjustments, it was determined that the District rates would need to be adjusted in order to align costs with revenues. Therefore, the existing and proposed rates are shown in Tables 1-6 (Water RTS) and 1-7 (Water Commodity Charges) and Table 1-8 (Wastewater). Please note that Water RTS charges become effective on a fiscal year basis, whereas Water Commodity charges become effective January 1 of each calendar year. BLACK & VEATCH CORPORATION Table of Contents 7

10 Water, Wastewater & Fee Study Vallecitos Water District, CA Table 1-6. Existing and Proposed Water RTS Charges Description Existing Proposed Proposed Proposed FY 12/13 FY 13/14 FY 14/15 FY 15/16 Readiness To Serve Charge (monthly) 5/8" $ $ $ $ /4" " " " " " " 1, , " 2, , , , Multi Family Temp Construction Meter Firelines Table 1-7. Existing and Proposed Water Commodity Charges Description Existing Proposed Proposed Proposed CY 2013 CY 2014 CY 2015 CY 2016 Commodity Charge ($/HCF) M&I Tier 1 $ 3.31 $ 3.41 $ 3.51 $ 3.60 Tier Tier Non-participating AG Tier Tier Tier SAWR Tier Tier Tier B&V PROJECT NO SEPTEMBER 3, 2013

11 Vallecitos Water District, CA Water, Wastewater & Fee Study Table 1-8. Wastewater Rates for FY 12/13 FY 15/16 Existing Adopted Proposed Proposed Description FY 12/13 FY 13/14 FY 14/15 FY 15/16 Monthly Sewer Service Charge Residential Single Family (per dwelling unit) $ $ $ $ Multi Family (per dwelling unit) Mobile Home (per dwelling unit) Non-Residential Flow (per 100 cu ft) Non-Residential Minimum Charge: Comm/Industrial (per employee) Restaurant (per seat) Hotel/Motel/Conv (per living unit) Laundromat (per machine) School (per student) Church/Theater (per seat) Minimum District Staff Labor Overhead Rate 1. Black & Veatch recommends that the District utilize a 195 percent overhead rate for FY 13/14. The District can use this rate to apply to outside contractor costs, developer projects and miscellaneous billings to help recover District support associated with these costs. 2. Furthermore, Black & Veatch recommends that the District conduct an annual review of direct and indirect costs and the resulting overhead rate as these costs tend to change from year to year. The review and implementation of overhead rates should be effective as of July 1 of each fiscal year based on that year s approved budget District Miscellaneous Fees and Charges 1. The current District Administrative and Engineering/Inspection fees are included in District ordinances and provide cost recovery for services provided by the District that primarily benefit the applicant for such services. The Black & Veatch analysis found that these fees are out-of-date and the schedule of services excludes many services that the District provides where no fee or charge exists. Black & Veatch recommends that the District adopt the proposed fee schedule derived in the miscellaneous fee analysis. The fee schedule represents the maximum justified fees that could be charged by the District. Because the fee schedule is comprehensive, it is not included in this section of the report but is represented in Section 6 of this report Allocation of Administrative Costs between Water and Wastewater Funds 1. Current District practice is to allocate administrative costs to the water and wastewater funds based on effort expended and costs charged to each fund. For those costs that are common to both systems or are not directly charged, the long-standing District practice has been to allocate 60 percent of these costs to the water system and the remaining 40 percent to the wastewater system. Despite this long-standing practice, there is no BLACK & VEATCH CORPORATION Table of Contents 9

12 Water, Wastewater & Fee Study Vallecitos Water District, CA documentation available to demonstrate the basis or methodology used to make this determination. Black & Veatch recommends that the District allocate common or non-direct charged costs to water and wastewater systems based on the ratio of water and wastewater customer accounts. Roughly 51 percent of total accounts are water-related and 49 percent are wastewater-related. Therefore, we recommend that common and non-direct charged costs are allocated 51 percent to water and 49 percent to sewer beginning in FY 13/ Reserve Policies By Resolution No. 1395, the District maintains the following reserve fund accounts: Operating Reserve (Water) Set at 180 days of budgeted operating expenses, less water purchase costs. Operating Reserve (Wastewater) Set at 180 days of budgeted operating expenses. OPEB Reserve - Set to equal the recorded obligation to fund Other Post-Employment Benefits (OPEB) in accordance with GASB 45. Replacement Reserve (Water) Set at greater than the sum of the next 3 years of projected system replacement costs, but less than the next ten years of projected system replacement costs. Replacement Reserve (Wastewater) Set greater than the sum of the next 3 years of projected system replacement costs, but less than the next ten years of projected system replacement costs. Rate Stabilization Fund Reserve amounts accumulated in excess of OPEB, operating, and replacement reserve limits are transferred to a rate stabilization fund. These funds are used to restore reserves to their limits in subsequent years while holding customer rates steady. If the rate stabilization fund balance continues to increase, customer rates could be lowered to the extent deemed necessary by management and subject to Board approval. 1. The current Operating Reserve and Replacement Reserve limits are adequate based on Black & Veatch experience and knowledge of industry standards. The District does maintain an OPEB reserve; however, Black & Veatch cannot comment on the adequacy of this account balance. As required by GASB 45, the District should undergo an actuarial analysis of the OPEB needs every 2 years. Revenues from capacity charges (capacity funds) are linked to growth-related capital. As such, capacity funds are completely independent of O&M funds. Therefore, should there be negative capacity fund balances, customer rates would not be influenced. 2. Black & Veatch recommends that language be added to the Rate Stabilization Fund section of the Resolution to account for the impending increase in water purchase costs as the District melds desalinated water to its water supply portfolio. If current projected customer rates do not provide sufficient excess funds toward the Rate Stabilization Fund, we recommend phasing in increases on an annual basis up to a point of meeting anticipated water supply costs. 10 B&V PROJECT NO SEPTEMBER 3, 2013

13 Vallecitos Water District, CA Water, Wastewater & Fee Study Water and Wastewater Financial Modeling 1. Within both utility models, footnote the sources of hardcoded data. 2. Within both utility models, footnote assumptions within a calculated cell (i.e. escalation factors) and explain calculation. 3. Within both utility models, identify cells that are hard coded or equation-based using different color schemes. 4. Within both utility models, separate and label sections within sheets to allow user to follow steps. 5. Within both utility models, link the revenue model to the O&M and capital model. The Cut and Paste functions are susceptible to errors or omissions. Furthermore, linkages provide a live update to other dependent areas of the model. 6. Within the wastewater model, on the main summary page, identify the source of the reclaimed water revenue. 7. Within the wastewater model FY summary sheets: o o o o o Identify the number of accounts for all customers, which include California State University, San Marcos (CSUSM), Hollandia, and County. Identify the flat customer class (type of customer). Put the units for CSUSM and Hollandia rather than just charges. Tracking units for these customers provides historic information as well as the basis for cost of service analyses. Identify the County customers by class and place the units rather than just charges. Identify the Sewer Units Charged to Customers on Flow by customer class. 8. Within the water model in the Cost Summary sheets, footnote the source of the costs and any future escalations. 9. Within the water model Sales Summary sheets, footnote the allocations source for tiers. 10. Within the water model RTS Sheet, identify the meter sizes associated with TCM, Fire, Non-Participating AG and SAWR. These will be important when allocating costs to these components. 1.4 DISCLAIMER In conducting our study, we reviewed the books, records, agreements, capital improvement programs, and customer sales and financial projections of the Water and Wastewater Funds as we deemed necessary to express our opinion of the operating results and projections. While we consider such books, records, documents, and projections to be reliable, Black & Veatch has not verified the accuracy of these documents. The projections set forth in this report below are intended as forward-looking statements. In formulating these projections, Black & Veatch has made certain assumptions with respect to conditions, events, and circumstances that may occur in the future. The methodology utilized in performing the analyses follows generally accepted practices for such projections. Such assumptions and methodologies are reasonable and appropriate for the purpose for which they are BLACK & VEATCH CORPORATION Table of Contents 11

14 Water, Wastewater & Fee Study Vallecitos Water District, CA used. While we believe the assumptions are reasonable and the projection methodologies valid, actual results may differ materially from those projected, as influenced by the conditions, events, and circumstances that actually occur. Such factors may include the Water and Wastewater Funds abilities to execute the capital improvement program as scheduled and within budget, regional climate and weather conditions affecting the demand for water, and adverse legislative, regulatory or legal decisions (including environmental laws and regulations) affecting both Funds abilities to manage the system and meet quality requirements. 12 B&V PROJECT NO SEPTEMBER 3, 2013

15 Vallecitos Water District, CA Water, Wastewater & Fee Study 2 Water Financial Validation and Cost of Service Study 2.1 CUSTOMER PROJECTIONS The Water Fund has residential, commercial, institutional, irrigation, agricultural, and fire customer classes. The Water Fund does not rely solely on customer type classes to distribute costs, but rather on meter size classifications as well. The concept behind this classification method is that each customer will use water in the same fashion based on its meter size rather than a specific customer type. The customer classes that are identified separately are Temporary Construction Meters, Non-participating Agricultural (AG) and Special Agricultural Water Rate (SAWR). As described in the District s Ordinance No. 171, the Non-participating AG and SAWR are defined as follows: The qualifications for Agricultural service are defined by Metropolitan Water District (MWD). Eligibility for credit from MWD and the Water Authority requires certification to participate in the Metropolitan Water District Interim Agricultural Water Program (IAWP) and the Water Authority Special Agricultural Water Rate Program (SAWR). Agricultural customers not participating in either IAWP or SAWR are eligible for the Certified Non - Participating rate providing they certify to the District that they meet the requirements set forth by MWD for IAWP. Tables 2-1 and 2-2 present the projected accounts and volumes by meter sizes as anticipated by the District for the next 5 years. Table 2-1. Number of Accounts Fiscal Year Ending June 30, Description FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 (accts) (accts) (accts) (accts) (accts) Meter Size 5/8" 18,145 18,322 18,489 18,650 18,812 3/4" " " " " " " " Total 21,165 21,362 21,547 21,727 21,907 Multi Family Temp Construction Meter (3-in) Fireline BLACK & VEATCH CORPORATION Table of Contents 13

16 Water, Wastewater & Fee Study Vallecitos Water District, CA Line No. Description Table 2-2. Billed Water Volume 2.2 REVENUE AND REVENUE REQUIREMENTS The revenue and revenue requirements were provided by the District for FY 13/14 to FY 17/18. The District maintains three primary sub funds within the Water Fund: 1) operating, 2) replacement, and 3) capacity. The replacement fund and capacity fund primarily fund capital projects, while the operating fund is strictly linked to day-to-day operations. The District maintains the entire Water Fund as a self supporting enterprise and thus the financials are independent of the District s other funds. The following is a summary of the District water 5-year financial plan Projected Operating Fund Results Fiscal Year Ending June 30, FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 (HCF) (HCF) (HCF) (HCF) (HCF) Meter Size 1 5/8" and 3/4" 3,098,731 3,128,327 3,156,120 3,183,002 3,209, " 490, , , , , " 901, , , , , " 1,070,516 1,077,851 1,084,778 1,091,417 1,098, "+ 579, , , , ,794 6 Total 6,140,307 6,170,692 6,206,375 6,240,950 6,276,000 7 Multi Family (dwelling units) 842, , , , ,611 8 Temp Construction Meter (3-in) 15,335 15,335 15,335 15,335 15,335 9 Non-Particiapting AG 138, , , , , SAWR 428, , , , ,225 The revenue requirements of the Water Fund s operating fund consist of system Operations and Maintenance (O&M) expenses, water purchase costs, capital projects and transfers. Table 2-3 reflects the operating cash flow. The adopted financial plan incorporates capital projects and keeps the Water Fund at a positive cash flow basis over the study period. The operating fund is subdivided into revenue and revenue requirements. In lines 1 and 2 of Table 2-3 are the revenues under existing and proposed rates. Line 3 represents pumping surcharges that are used to help offset the power costs of water operations. Lines 4 through 7 represent other revenues, which include property taxes, interest earned from the investment of available funds and miscellaneous revenues. Line 9 illustrates the total revenues generated from existing rates, additional revenue from proposed rate increases, and other operating revenue. The revenue requirements for O&M, water purchases, capital projects, and transfers were derived by the District. These revenue requirements are shown on lines 10 through 34 of Table 2-3. Line 34 represents that total revenue requirement that will need to be met through revenue. The net cumulative balance is indicated in line 37. The District strives to maintain a three-year minimum reserve balance and a ten-year maximum reserve balance. The financial plan provides the District the ability to maintain a positive balance while still being able to meet capital improvement obligations and debt service coverage. The debt service coverage ratio on current bonds is 1.15x (net revenues less O&M expenses meet annual debt service payments plus a 15 percent cushion ). This requirement is set forth by the financial institutions and is based on mandatory expenses only. Items such as capital projects and transfers are excluded. 14 B&V PROJECT NO SEPTEMBER 3, 2013

17 Vallecitos Water District, CA Water, Wastewater & Fee Study Line No. Description Projected Capacity Fund Results Table 2-3. Operating Cash Flow Fiscal Year Ending June 30, FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 ($) ($) ($) ($) ($) Revenue Operating Revenue 1 Revenue from Water Sales 27,371,000 28,826,000 30,369,000 31,894,000 33,446,000 2 Revenue from Ready to Serve 11,210,000 12,068,000 12,876,000 13,685,000 14,361,000 3 Pumping Charges 189, , , , ,000 4 Other Miscellaneous 796, , , , ,000 5 Property Taxes 882, , , , ,000 6 Investment Earnings 78, , , , ,000 7 Payment on Land Sale to City 74,000 74,000 74,000 74,000 74,000 8 Subtotal Operating Revenue 40,600,000 42,648,000 45,052,000 47,434,000 49,700,000 9 Total Revenue $ 40,600,000 $ 42,648,000 $ 45,052,000 $ 47,434,000 $ 49,700,000 Revenue Requirements Operating & Maintenance 10 Water Purchases 24,589,000 25,731,000 28,482,000 33,131,000 36,608, Pumping 363, , , , , Water Quality 156, , , , , Water Treatment 362, , , , , Tanks & Reservoirs 375, , , , , Transmission & Distribution 1,224,000 1,361,000 1,448,000 1,521,000 1,618, Services 194, , , , , Meters 605, , , , , Backflow Prevention 62,000 64,000 66,000 71,000 75, Customer Accounts 784, , , , , Equipment & Vehicles 296, , , , , Building & Grounds 336, , , , , Engineering 1,329,000 1,385,000 1,490,000 1,731,000 1,840, Safety & Regulatory Affairs 245, , , , , Information Technology 652, , , , , General & Administrative 3,471,000 3,241,000 3,499,000 3,723,000 3,963, Subtotal O&M 35,043,000 36,369,000 39,807,000 45,162,000 49,319,000 Capital Projects 27 Capital Improvement Projects 1,746, , ,900 (488,000) 0 28 Total Capital Projects 1,746, , ,900 (488,000) 0 Transfers 29 To Fund OPEB Trust 25,700 5, Total Transfers 25,700 5, Total Revenue Requirements $ 36,815,100 $ 36,752,200 $ 40,488,900 $ 44,674,000 $ 49,319, Net Annual Cash Balance 3,784,900 5,895,800 4,563,100 2,760, , Beginning Fund Balance 14,180,000 17,964,900 23,860,700 28,423,800 31,183, Net Cumulative Fund Balance $ 17,964,900 $ 23,860,700 $ 28,423,800 $ 31,183,800 $ 31,564,800 The revenue requirements of the Water Fund s restricted capacity fund consist of system debt service requirements and capital projects. Capital projects financed through this fund are restricted to growth-oriented projects, rather than replacement projects. Table 2-4 reflects the capital cash flow. The adopted financial plan anticipates shortfalls over the study period. BLACK & VEATCH CORPORATION Table of Contents 15

18 Water, Wastewater & Fee Study Vallecitos Water District, CA The capacity fund is subdivided into sources and uses. Lines 1 to 3 show the revenue sources. The primary source of income is derived from capital facility charges associated with new construction. In order to fund all planned capital projects, the District will rely on transfers from the operating fund. The uses for debt service and capital projects were derived by the District. These uses are shown on lines 5 through 18 of Table 2-4. The net cumulative balance is indicated in line 21. Table 2-4. Capital Cash Flow Line No. Description Fiscal Year Ending June 30, FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 Source of Funds 1 Debt Proceeds Capital Facility and Impact Fees 2,699,000 2,421,000 1,772,000 1,090,000 1,117,000 3 Investment Earnings (20,000) (25,000) (29,000) (34,000) (41,000) 4 Total Sources $ 2,679,000 $ 2,396,000 $ 1,743,000 $ 1,056,000 $ 1,076,000 Use of Funds 5 San Elijo Hills Pump Station 983, Vulnerability Assessment Improvements 276, High Point Pipeline 0 700, Water and Sewer Master Plan 150, , Questhaven Basin Water and Sewer Facilitie 58,400 58, Desalinated Water Connection 70, , , Environmental Mitigation Property 0 5,000 10,000 10,000 10, Mountain Belle Pump Station & Pipeline Des , Coronado Hills Tank # , Miscellaneous Projects 21, Total Uses $ 1,559,000 $ 1,168,400 $ 160,000 $ 10,000 $ 640,000 Debt Service 16 Existing Long Term Debt A Series 2,243,800 2,251,000 2,251,500 2,251,500 2,238, Total Debt Service $ 2,243,800 $ 2,251,000 $ 2,251,500 $ 2,251,500 $ 2,238, Net Annual Cash Balance (1,123,800) (1,023,400) (668,500) (1,205,500) (1,802,700) 20 Beginning Unrestricted Fund Balance (3,540,000) (4,663,800) (5,687,200) (6,355,700) (7,561,200) 21 Net Cumulative Fund Balance $ (4,663,800) $ (5,687,200) $ (6,355,700) $ (7,561,200) $ (9,363,900) Test Year Revenue Requirements In analyzing the Water Fund s cost of service for allocation to its customer classes, the annual revenue requirements for FY 13/14 are selected as the Test Year requirements to demonstrate the development of cost-of-service water rates. Based on achieving the Water Fund s principal goals within the study period, the cash flow in Table 2-3 serves as the basis for the cost of service analyses. 16 B&V PROJECT NO SEPTEMBER 3, 2013

19 Vallecitos Water District, CA Water, Wastewater & Fee Study 3 Water Cost of Service Allocation The revenue requirements to be derived from rates for water services are synonymous with the definition of the Cost of Service (COS). In developing equitable rate structures, revenue requirements are allocable to the various customer classifications according to customer demands and services rendered. Allocations of these requirements to customer classes should take into account the water consumed, peak flows of the system, number of customers, and other relevant factors. The total costs of service recovered from water service rates for the Test Year FY 13/14 are summarized in Table 3-1. Table 3-1. Cost of Service Line Operating Capital Total No. Description Expense Cost Cost ($) ($) ($) Revenue Requirements 1 O&M Expenses 10,454, ,454,000 2 Water Supply 24,589, ,589,000 3 Capital Projects 0 1,746,400 1,746,400 4 Transfers 25, ,700 5 Subtotal 35,068,700 1,746,400 36,815,100 Less Revenue Requirements Met from Other Sources 6 Pumping Charges 189, ,000 7 Other Operating Revenue 1,830, ,830,000 8 Subtotal 2,019, ,019,000 Adjustments 9 Adjustment for Annual Cash Balanc (3,784,900) 0 (3,784,900) 10 Subtotal (3,784,900) 0 (3,784,900) 11 Cost of Service to be Recovered from $ 36,834,600 $ 1,746,400 $ 38,581,000 Shown in line 5 are the total revenue requirements. In order to derive the revenue requirement that will need to be recovered by the rates, it is necessary to deduct revenues from other sources as shown in lines 8 and 10. Line 9 represents the net annual cash balance for the Water Fund during the Test Year. In this case, the $3,784,900 indicates that the Water Fund is projecting an increase to the cash balance for the year. Line 11 represents the total costs that are to be recovered from customer rates. 3.1 FUNCTIONAL COST COMPONENTS The cost of providing water service should be analyzed by system function in order to properly allocate the costs to the various classes of customers and subsequently design rates. As a basis for allocating costs of service among customer classes, costs may be separated into the following four basic functional cost components: (1) Base ; (2) Extra Capacity ; (3) Customer ; and (4) Direct Assignment. BLACK & VEATCH CORPORATION Table of Contents 17

20 Water, Wastewater & Fee Study Vallecitos Water District, CA Base costs represent operating and capital costs of the system associated with service to customers to the extent required for a constant, or average annual rate of use. Extra Capacity costs represent those operating costs incurred in meeting demands in excess of average, and capital related costs for additional plant and system capacity beyond that required for the average rate of use. Customer costs are defined as those that tend to vary in proportion to the number of customers connected to the system. These include meter reading, billing, collecting and accounting, and maintenance and capital costs associated with meters and services. Directly assigned costs are costs specifically identified as those incurred to serve a specific customer group or groups of customers. The separation of costs of service into these principal categories facilitates allocating such costs to the various customer classes on the basis of the respective service requirements of each class. 3.2 ALLOCATION TO COST COMPONENTS Each element of cost is allocated to functional cost components on the basis of the parameter or parameters having the most significant influence on the magnitude of that element of cost. O&M expense items are allocated directly to appropriate cost components, while the allocation of capital costs is based upon a detailed allocation of related capital investment. The separation of costs into functional components provides a means for distributing such costs to the various classes of customers on the basis of their respective responsibilities for each particular type of service. Black & Veatch performed the following steps to derive the allocation percentages for apportioning the District s O&M and capital costs. As noted above, elements that are allocated directly to their cost component include customer costs and direct assigned costs. For volume-related cost allocations, the first step in determining the allocation percentages is to assign system peaking factors. These peaking factors are calculated based on water consumption patterns for the water system as a whole and are found in the District s 2010 Master Plan. The base element is equal to the average daily demand (ADD) and assigned a value of 1.0. The District s maximum day (max day) demand is estimated to be 1.90 times the ADD. Thus, the max day is assigned a value of The maximum instantaneous usage is approximated by the maximum hourly (max hour) usage and is estimated to be 3.00 times the ADD. Thus, max hour is assigned a value of 3.0. Cost components that are solely base-related, are allocated 100 percent to base. Cost components that are designed to meet max day requirements, such as reservoirs, are allocated to base and max day factors as follows: Base = (1.0/1.9) x 100 = 52.6% Max Day = ( )/1.9 x 100 = 47.4% Cost components that are designed to meet max hour design requirements, such as Distribution, are allocated in a similar fashion, as follows: Base = (1.0/3.0) x 100 = 33.3% Max Day = ( )/3.0 x 100 = 30.0% 18 B&V PROJECT NO SEPTEMBER 3, 2013

21 Vallecitos Water District, CA Water, Wastewater & Fee Study Max Hour = ( )/3.0 x 100 = 36.7% Allocation of Operating and Maintenance Expense In the allocation of O&M expense, costs are allocated directly to cost components to the extent possible. Engineering, Information Technology, General and Administrative, and other cost elements are then allocated on the basis of estimated allocation of other costs. Table 3-2 represents the allocation of O&M to the functional cost components. Upon allocation to functional cost components, revenues from other sources as shown in Table 3-1 lines 8 and 10 are subtracted Allocation of Capital Investments The estimated new investment in the water system is allocated to appropriate cost components as a basis for the further distribution of capital related costs to the various meter sizes and customer classes. The new investment is allocated on the basis of total existing assets. A distribution of the new water investment is shown in Table 3-3. Upon allocation to functional cost components, revenues from other sources as shown in Table 3-1 lines 8 and 10 are subtracted. BLACK & VEATCH CORPORATION Table of Contents 19

22 Water, Wastewater & Fee Study Vallecitos Water District, CA Table 3-2. Allocation of O&M Expenditures Common to All Customers Line Base Extra Capacity Customer Fire No. Description Total Costs Base Max. Day Max. Hour Meters Cust/Bill. Protection ($) ($) ($) ($) ($) ($) ($) Operating Expenses 1 Water Purchases 24,589,000 19,480, ,108, Pumping 363, , , Water Quality 156, , Water Treatment 362, , , Tanks & Reservoirs 375, , , , ,600 6 Transmission & Distribution 1,224, , , , ,400 7 Services 194, , Meters 605, , Backflow Prevention 62,000 20,700 18,600 22, Customer Accounts 784, , Equipment & Vehicles 296, , Building & Grounds 336, ,000 67,200 67,200 16,800 8,400 8, Engineering 1,329, , , , , Safety & Regulatory Affairs 245, , Information Technology 652, , General & Administrative 3,166,700 1,583, , , ,300 79,200 79, Total O&M Expenses $ 34,738,700 $ 22,722,700 $ 1,940,900 $ 1,796,800 $ 6,623,200 $ 1,523,600 $ 131,500 Less Other Revenue 18 Miscellaneous Revenues 1,689, , , ,800 84,500 42,200 42, Other Adjustments (3,784,900) (1,892,500) (757,000) (757,000) (189,200) (94,600) (94,600) 20 Net Operating Expenses $ 36,834,600 $ 23,770,700 $ 2,360,100 $ 2,216,000 $ 6,727,900 $ 1,576,000 $ 183, B&V PROJECT NO SEPTEMBER 3, 2013

23 Vallecitos Water District, CA Water, Wastewater & Fee Study Line No. Description Table 3-3. Allocation of Capital Costs Common to All Customers Base Extra Capacity Customer Fire Total Costs Base Max. Day Max. Hour Meters Cust/Bill. Protection ($) ($) ($) ($) ($) ($) ($) Plant Assets 1 Water Purchases 4,500 3, Pumping 98,100 51,600 46, Water Quality Water Treatment 3,600 1,900 1, Tanks & Reservoirs 591, , , , ,900 6 Transmission & Distribution 602, , , , ,000 7 Services 191, , Meters 66, , Backflow Prevention General Plant 187,800 52,700 49,000 52,800 31, , Total Plant Assets $ 1,746,400 $ 490,000 $ 455,500 $ 490,700 $ 290,100 $ 0 $ 20,100 Less Other Revenue 12 Miscellaneous Revenues Other Adjustments Net Capital Expenses $ 1,746,400 $ 490,000 $ 455,500 $ 490,700 $ 290,100 $ 0 $ 20,100 BLACK & VEATCH CORPORATION 2BWater Cost of Service Allocation 21

24 Water, Wastewater & Fee Study Vallecitos Water District, CA 3.3 UNITS OF SERVICE The total cost responsibility for each customer class may be established by developing unit costs of service for each cost function and subsequently assigning those costs to the customer classes based on the respective service requirements of each. To properly recognize the cost of service, each customer class is allocated its share of base, maximum day and maximum hour costs. The number of units of service required by each customer class provides a means for the proportionate distribution of costs previously allocated to respective cost categories. Base costs vary with the volume of water used and are distributed to customer classes on that basis. Extra Capacity costs are those associated with meeting maximum rates of water use, and are distributed to customer classes on the basis of the respective class capacity requirements in excess of average rates of use. Customer costs, which consist of meter related, billing, collection and accounting costs, are allocated to the various classes on the basis of the number of bills and equivalent meters. Equivalent meter ratios are established using a combination of hydraulic capacity and meter investment costs. This approach is further explained in Section 4.1. The estimated number of equivalent meters for each customer class is based on the total number of various sizes of meters serving respective classes and the ratio of the cost of meters for the various sizes to the cost of 3/4-inch meters. Private fire protection costs are allocated on the basis of equivalent fire hydrants. The extra capacity units are determined based on a capacity factor between maximum day and maximum hour to average day. Generally, residential customers experience a higher maximum to average demand ratio than the industrial customer class. Maximum hour usage information by individual customer class is not available. As such, assumptions for maximum day and maximum hour ratios for each customer class have been made based on experience with other water utilities with similar characteristics. Allocating to these parameters ties costs to peaking elements. 3.4 COST OF SERVICE ALLOCATIONS The costs of service are distributed to the various meter sizes and customer classes by applying the unit costs of service to respective service requirements. The total unit costs of service applied to the respective requirements for each meter size and customer class results in the total cost of service for each Units Costs of Service The Test Year unit cost of service for each functional cost component is based on the total cost divided by the applicable units of service as shown in Table 3-4. In lines 1 and 2, the total operating and capital costs represent the cost to be recovered from rates as shown in Table 3-1 line 11. Line 5 represents the unit costs that are used in allocating the costs to the specific customer classes Distribution of Costs of Service to Customer Classes The customer class responsibility for service is obtained by applying the unit costs of service to the number of units for which the meter size and customer class is responsible. This process is illustrated in Table 3-5 in which the unit costs of service are applied to the customer class of units of service. 22 B&V PROJECT NO SEPTEMBER 3, 2013