BMA. providing the availability of service at the point of consumer use A smaller portion of autility system

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2 In 2008 the commissioned a report to assess the fairness and equity of the current two part water sewer rate structure and determine the impacts of proposed changes on ratepayers The Study was prepared by RM Loudon Ltd referred to hereafter as the Loudon Report and presented to Council on April The Council of the City of Niagara Falls will consider the Loudon report and recommendations on October The nine recommendations of the Study prepared include a rate structure change whereby approximately 75 of costs will be recovered through a volumetric charge and the remaining 25 of costs will be recovered through a fixed monthly charge The proposed rate structure has a significant impact on the large users in the Summary of Findings Despite industry trends in rate making as stated by the Canadian Water Works Association CWWA there is and always will be a lot of variation in rate setting practices given that there is no single rate setting approach or rate structure A variety of alternative rate structures can be used depending on the goals and objectives of the municipality As the City addresses water wastewater financial challenges it is extremely important that the rate structure be responsive to the unique circumstances and values of the community While the report prepared by Mr Loudon outlines principles and suggests a need to decide which principles are most appropriate the process to date does not appear to have included a formalization and endorsement of the recommended priority principles by Council nor does it identify how these priorities were established As such our assessed the rate structure against those principles put forward in the Loudon Report as priorities The large amount of capital required to fund a utility system combined with operating labour insurance and other costs of operations which do not vary with the consumption of water consumed means that the majority of water utility costs typically 70 to 90 percent are fixed Fixed costs are incurred whether or not customers consume water and are associated with providing the availability of service at the point of consumer use A smaller portion of autility system cost is variable and changes with the volume of water consumedie the cost of chemicals power for treatment and pumping etc The recommendation to lower the fixed service charge will clearly increase revenue ins abilit which is one of the key priorities identified in the report and has not been adequately rationalized from a fairness and equity perspective as some capital and fixed costs were excluded from the fixed service charge Page 1 Mfjff MYr il rrbry MC

3 Because of revenue instability the report recommends a conservative approach to future rate setting and also the need to establish appropriate Stabilization Reserves and policies The policies for these reserves or how a conservative approach to rate setting will be funded have not been included in the report These policy decisions will impact rates order to make an informed decision these policies should be articulated in the report and included in the impact analysis Moving to the fixed to volumetric needs to be rationalized more clearly in the Loudon Report as there is evidence to conclude that the current approach already provides a more appropriate allocation based on the actual underlying costs It appears that the 25 allocation was arbitrarily selected In the Development Charge Background Study prepared by CN Watson and Associates it stated over the 10 year forecast period 925 of the costs of new water and sewer capital infrastructure are needed to support the residential development and only 75 of the costs are required fornon residential development This analysis clearly shows that the capital costs to service the residential sector are much higher than the ICI sector however based on the recommendations in the Loudon Report the majority of the replacement costs will be paid for by the ICI sector Under the proposed rate structure there are several problems with respect to the treatment of capital Firstly not all fixed capital costs have been included in the fixed service charge Secondly the cost of infrastructure to service each class is not recognized as previously pointed out These problems are compounded by the fact that the City infrastructure is in need of increased capital spending which will put an increased burden on high volume users in the ICI sector The AWWA manual provides the maximum safe flow or capacity of and 3 meters The ratios of these capacities relative to that of a58meter are computed and range from 25 for a 1 meter up to 150for a 3 meter As pointed out by AWWA while capacity ratios for meters larger than 3 can be computed the use of such ratios for large meters may or may not provide atrue indication of the potential demand requirements of the large meters While the Loudon Report states that the AWWA factors were used for meter capacity ratios there were some inconsistencies at 3 or less and the factors used above the 3 threshold were extremely high and could not be substantiated based on the information included in the report The ratios used for large meters are significantly higher than municipal benchmarks As identified in the Loudon Report 1 of the customers 294 ICI customers use 45 of consumption The cost of leakage andi totaling approximately59 million are recovered through the volumetric rate Therefore 1 of the users pay 45 of these costs and the remaining 99 of customers only pay 55 of the costs MCX CBltlC hlckiu Hir Inc In Page 2

4 It can be argued that these leakage andicosts are not related to volumes consumed but are more related to the length of pipe attributed to each customer class There are proportionally more kilometers of pipe in the Residential class relative to the volumes consumed compared with the ICI class A fairer and more equitable approach would be to recover these costs by customer class One of the objectives of the rate review is to recommend a rate structure that best satisfies the public concerns However the report appears to be heavily weighted on the residential perspective particularly one resident with limited consideration for the ICI sector or other positions A balanced and objective approach is needed particularly given that the ICI sector plays a more significant role in the economic viability of the community in Niagara Falls compared to the majority of other municipalities in Ontario The Loudon Report does not provide sufficient evidence as to why a declining block structure was not recommended to recognize the difference in costs related to each property class particularly in light of the fact that a larger portion of fixed costs have been recommended to be recovered through the volumetric rate Due consideration is approach needed in terms of the fairness and equity of the recommended The recommended rate structure supports affordability from a residential oersoective since a large portion of the fixed costs have been transferred to ICI sector through a volumetric charge However the ICI sector in general plays a vital role in the local economy The manufacturing sector has already been hard hit as identified in the Urban Metrics Inc report and is expected to see further declines in job growth and the tourism industry is beginning to feel the impacts of a softening economy The recommendations in the Loudon Report will negatively impact these sectors and may cause affordability issues especially in light of the current economic environment The existing rate structure which already provides a fair and equitable allocation of costs to be recovered from different customer classes continues to support the City s underlying principles and priorities Based on the above noted issues and concerns it is recommended that additional analysis and rationalization be undertaken prior to making any change to the existing rate structure Further the Region is currently undertaking a rate structure review which will impact retail rates and decision making As such it is prudent for the City to postpone any decision until the results of the Region sstudy have been released and the impact on the retail rates are known Page 3 MonCxyxr Nrlcxi tf ny N7c

5 Guiding Principles The Loudon Report states that it is useful to consider and decide which principles will be used before deciding cost recovery methods and developing the format of the charges In any case it is important for the City to agree as they are used to set strategy While the report outlines principles and suggests a need to decide which principles are most appropriate the process does not appear to have included a formalization and endorsement of the recommended priority principles by Council nor does it identify how these priorities were established As the City addresses water wastewater financial challenges it is extremely important that the rate structure be responsive to the unique circumstances and values of the community and be set with a focus on the mid to long term impacts of these decisions Assuming the principles outlined in the Loudon report do in fact reflect the priorities of the municipality the following general observations have been made with respect to the proposed rate structure Priorities included revenue adequacy security legality practicality simplicity and above all else fairness and user ability to pay As will be discussed in this review while some of the recommendations put forward for the rate structure achieve these principles other recommendations in fact have not met these principles eg fairness and equity revenue adequacy and security The report states that conservation water use efficiency and encouraging industrial development may also be City priorities but they are best implemented using other tr i Yet throughout the report the recommended approach to reduce the fixed service charge to 25 is done to promote conservation and has not been fully rationalized with respect to the underlying costs This recommendation also has the impact of significantly increasing costs to high volume commercial and industrial users which is contrary to the City objectives contained in other policy documents of encouraging industrial development Recommendations That the principles to guide the rate setting process be approved by Council to ensure alignment with the Community scollective vision for the future and the unique circumstances in the Page 4 MYNk XEMWYtvrrygf7 Nc

6 Increased Revenue Instability This year is a prime example of what can happen when consumption does not follow predictable patterns With one of the wettest summers consumption is well below projections across Ontario resulting in revenue shortfalls in a number of municipalities structure employed by the City is buffered to a greater extent than a number of municipalities because the existing rate structure has a relatively large fixed cost component proposed rate structure the City will be at increased risk if projected consumptions The current rate Under the are lower than Further even though consumption to date in 2008 is down significantly in the City expenditures have not been reduced by a commensurate amount because so many of the costs are fixed and not tied to the volumes consumed This further reinforces the need to clearly determine the appropriate costs to be included in the fixed service charge and what will be included in the volumetric rate Without such distinction the City is at risk of additional revenue shortfalls in future years when consumption is less than predicted One of the key principles identified in the Loudon Report is revenue adequacy and security The report states that revenues must be adequate to meet financing needs The recommendation to lower the fixed service charge however will clearly increase revenue instability and has not been adequately rationalized from a fairness and equity perspective as all capital costs were not included in the fixed service charge To mitigate the revenue stability risk the Loudon Report includes the following That in order to offset the potential loss in revenue security resulting from a reduction in revenues generated from fixed costs projections used to set future rates be made on a conservative basis implies increasing rates and a Rate Stabilization Reserve Fund to cushion against established and funded unexpected user rate revenue shortfalls be A target level for the Rate Stabilization Reserve Fund along with a funding approach note this implies budgeting for a surplus needs to be established Page 5 Mgnr Xgn NAA N ltl

7 In accordance with the recommended conservative approach to future rate setting this implies that the City should either Reduce the projected consumption which will increase the overall volumetric rate to all customers this has not been reflected in the impact analysis or Establish a budgeted transfer to a Rate Stabilization Reserve Fund which would also increase costs to all customers this has not been reflected in the impact analysis While the use of a conservative basis is appropriate in light of the increase in revenue instability the impact analysis included in the report does not reflect how this recommendation will be implemented As such it is anticipated that the actual increases will in fact be raeater than what has been presented in the report The extent to which this will increase the impact on customers will be determined by the assumptions that will ultimately be used to set rates in 2009 The report states the need to establish appropriate Reserve policies however the policies on funding sources and targets have not been included which will impact rates In order to make an informed decision these policies should be articulated in the report and included in the impact analysis The level of Stabilization Reserves required will depend on several factors including Type of rate structure the more that costs are recovered through a fixed service charge the less need there is for a Stabilization Reserve With the recommended change in the rate structure more Reserves will undoubtedly be required than are currently required Underlying Costs when most costs are fixed in that they are not impacted by volumes consumed as is the case in the City s budget there is a greater need for Stabilization Reserves particularly when these fixed costs are recovered through the volumetric charge Further commencing in 2007 the Regional costs for sewer were based on a fixed amount irrespective of consumption based on a 3 year rolling average As such there is a need for additional Sewer Stabilization Reserves to provide downside protection against the Regional sewer costs which are Loudon Report to be recovered through the volumetric rate being recommended by the q Page 6

8 Recommendations To increase transparency it is recommended that the impact analysis be updated to reflect the recommendation made in the Loudon Report to use a conservative basis to setting future rates Further It is recommended that the report include clear policies statements with respects to Stabilization Reserve targets and funding That the report specifically address the City s downside risks associated with an economic downturn in the tourism industry and document the reasons why a low fixed rate component is appropriate Arbitrary Allocation to Fixed and Volumetric The water and wastewater industry is the most capital intensive of all utility sectors Capital intensity is high because of the need to maintain assured production capacity operate and maintain a complex distribution and collection network meet fire protection and peak demands and finally meet legislative requirements As stated in the Municipal Water and Wastewater Rate Manual published by Canadian Waterworks Association the water and wastewater industry is recognized as having relatively high rates of fixed costs Fixed costs are those unrelated to water volumes supplied variable costs on the other hand vary with volumes eg electricity chemicals etc The CWWA states in its manual that the volumetric charge for water servicing should contain only those costs which vary with volumes of water supplied and wastewater treated Costs unrelated to volumes supplied and treated are more appropriately recovered through fixed service charges Being very capital intensive implies that a water rate system with ahigh variable cost component may cause serious problems with regard to revenue stability Page 7 MIcQ0 crtt ry ifu

9 For example the Region s full allocation of wastewater costs to the City is fixed in that regardless of the volumes treated the City has a fixed amount based on a three year rolling average 112 million to the Region in 2007 However this cost is currently on the volumetric rate and is also being recommended to remain on the volumetric rate even though the City is required to pay for these Regional costs regardless of volumes consumed this decision should be articulated in the Loudon Report Justification for While sufficient breakdown of the City s costs was not included in the report to undertake a detailed analysis the following tables identify the current allocation to fixed the proposed allocation based on the Loudon Report recommendations as well as our analysis of the fixed to volumetric breakdown It should be noted that the assumptions used for our analysis of fixed are conservative in that there may be additional costs in the local operations that are fixed as well as some of the water regional costs Maraw enl Cfyi x nq Inc Page a

10 Proposed in RM Loudon Report Nia ara Falls Costs OnAratinn Billing Fire Protection Other Local Capital Lon Term Debt Principal Transfer to Own Fire Protection Regional Fixed Chare Volumetric Charge Less Revenues A of total W Page 9

11 There are a number of costs that can be linked directly to a customer in general or specifically to a class of customer such as meter replacement and repair meter reading billing collections and customer service It can also be argued that the cost of debt service reserve requirements and capital improvements could also be included in afixed charge The following summarizes the allocations of current allocation the recommendations contained in the Loudon Report as well as our analysis of the underlying costs in RMLoudon Report 25 ed on Information Available 62 From a fairness and equity perspective the actual underlying costs attributed to fixed is 62 compared with the recommended 25 in the Loudon Report On the City related expenditures a report prepared entitled Financing Water Infrastructure which was co authored by Mr Loudon the number of customers or geographic size of the system has the greatest impact on distribution or collection systems and customer related costs such as meter reading Yet as noted above the proposed rate structure does not allocate the majority of the local system costs to fixed While an allocation of all fixed costs to be recovered from the fixed service charge improves revenue stability and is fair and equitable meeting two City objectives it is generally not practical since it results in a low volumetric charge which discourages conservation not specifically identified as a City priority in the rate structure and negatively impacts low volume users affordability objective Moving to the250 o75fixed to volumetric needs to be rationalized more clearly in the Loudon Report as there is sufficient evidence to argue that the current approach already employed by the City provides a reasonable compromise between the actual costs and the priority principles established in the report It appears that the 25 allocation wasarbitrarily selected Pago 10

12 Benchmarkincl The following benchmarking table provides a comparison of the percentage of fixed to total water sewer costs for a Residential customer that consumes 300 m3 annually below the average percentage across the survey is 31 As shown Metre size mm Metre size inches Amr Residential 00 Fixed as Total 430 Barrie 25 Belleville 33 Bradford West Gwillimbur 36 Brantford 16 Cambridge 15 Central Elgin 29 Chatham Kent 42 Cobour 47 District of Muskoka 19 Fort Erie 53 Guelph 20 Hamilton 26 Kawartha Lakes 30 Kin 30 Kingston 59 Lincoln 67 Leamington 5 Newmarket 21 Niagara on thelake 41 Norfolk 28 North Bay 8 North Dumfries 11 Orangeville 18 Owen Sound 55 Parr Sound 99 Pelham 24 Peterborough 33 Port Colborne 47 Region of Durham 26 Metre size mm Metre size inches Re ion of Halton Resi dential 300 m2l as Total 33 Sarnia 31 Sault Ste Marie 32 St Catharines 30 St Thomas 22 Sudbury 37 Thunder Bay 15 Tillsonbur 50 Timmins 6 Waterloo 5 Welland 11 Wellesley 11 Wilmot 14 Windsor 72 Woolwich 31 Avera a 31 Nia ara Falls 51 Niagara Falls Proposed b Loudon 25 Further it is interesting to note that of the Niagara municipalities that have established a two part rate structure the average for these municipalities is 44 excluding Niagara Falls Page 11

13 Capital Cost Recovery and Allocation The Development Charges Act requires that a development charge background study must be completed by City Council before passing a development charges by law This study requires that the municipality examine each service to which a development charge would relate of the long term capital and operating costs for capital infrastructure required for the service The requirement of the Act is for a development forecast which refers to residential commercial industrial and institutional development A background study was prepared by the C N Watson Associates for the City in 2004 in accordance with the Act As stated in the report the charges calculated represent the full amount which can be recovered under the DCA based on the City s capital spending plans and other assumptions which are responsive to the requirements of the DCA Over the 10 year period the City population is expected to increase by 7 and non residential floor area is forecast to increase by 20 from The following summarizes the capital projects for water and wastewater and the amounts to be recovered from the residential and non residential sectors over the next 10 years As shown above over the 10 year forecast period 925 of the costs of new water and sewer capital infrastructure are needed to support the residential development and only75of the costs are required fornon residential development The costs of this new infrastructure will be paid for from development charge revenues however this new infrastructure has to be maintained and ultimately replaced Therefore by decreasing the fixed costs as stated in the Loudon report 1 or 294 ICI customers use 45of the water consumed It will be these non residential customers that will be paying the majority of the infrastructure maintenance and replacement costs even though the bulk of the Development Charge Background Study shows that infrastructure is required to service residential customers The amount of infrastructure required to service the residential sector versus the non residential sector illustrates the need to recognize class differences in the recovery of costs that support lifecycle costing for capital McXUagbmCn cxiv ANAinc Page 12

14 The Niagara Falls local economy is highly dependent on the tourism industry In fact on asur vey of 80 Ontario municipalities Niagara Falls has the highest commercial assessment with 26 of the total assessment base as commercial more than double the survey average of 108 Under the proposed rate structure there are several problems with respect to the treatment of capital Firstly not all fixed capital costs have been included in the fixed service charge as dis cussed earlier in the report Secondly the cost of infrastructure to service each class is not recognized These problems are compounded by the fact that the City infrastructure is in need of increased capital spending which will put a further burden on the ICI sector Inconsistencies in Meter Equivalencies Used There are different ways in which to measure or compute equivalent ratios for larger meters as compared to a58 meter or whatever the base size meter is appropriate The two most commonly used ratios in the water rate industry are equivalent meter cost ratios and equivalent meter capacity ratios both of which have been used in the RM Loudon Ltd report Meter Cost Ratios Generally equivalent meter cost ratios should be used when assigning elements of costs spe cifically related to meters among the various sizes of meters used by the customers in the sys tem The Loudon Report used this approach to allocate some capital costs The report states that AWWA factors were used however based on our analysis there were some minor differ ences noted Meter Capacity Ratios Meter capacity ratios are most often used when estimating potential capacity or demand re quirements for customers on the basis of the size of their water meter The RM Loudon Ltd report used this approach to allocate Fire Protection costs Page 13

15 The AWWA manual provides the maximum safe flow or capacity of meters tabulated The ratios of these capacities relative to that of a58 meter are computed and range from 25 for a 1 meter up to 150for a 3 meter As pointed out by AWWA while capacity ratios for meters larger than 3 can be computed the use of such ratios for large meters may or may not provide a true indication of the potential demand requirements of the large meters While the Loudon report states that the AWWA factors were used for meter capacity ratios there were some inconsistencies at 3 or less and the factors used above the 3 threshold were extremely high and could not be substantiated The following table summarizes the comparison of the AWWA factors against those used in the Loudon Report Mcxx39wnent CorwAng m Page 14

16 Benchmarkinq As shown in the following table the ratios between customer classes currently used to allocate fixed costs to the various meter sizes in Niagara Falls are significantly higher currently and what is being proposed for larger meters This table summarizes the ratios used in 44 other Ontario municipalities Further the ratios are higher than the AWWA standards With higher factors Niagara Falls is placing a larger proportionate burden on large users than the majority of the other municipalities surveyed It is interesting to note that the ratios used in other Niagara municipalities are well below those currently being used or proposed to be used in Niagara Falls Metre size mm Metre size inches Amherstbur Barrie Belleville Bradford West Gwillimbur Brantford Cambridge Central Elgin Chatham Kent Cobour District of Muskoka Fort Erie Guelph Hamilton Kawartha Lakes Kin Kingston Lincoln Leamin ton Newmarket Niagara on the Lake Norfolk North Bay North Dumfries Orangeville Owen Sound ParrSound to Pelham Peterborough Port Colborne Re ion of Durham Page 15

17 Metre size mm Region of Halton Sarnia Sault Ste Marie St Catharines St Thomas Sudbury Thunder Bay Tillsonbur Timmins Waterloo Welland Wellesley Wilmot D Windsor Niaqara alls Nia ara Falls Proposed b Loudon AWWA Recommendations That the Loudon Report be updated to include a summary of the calculations used to determine the capacity factors to allocate fire protection costs as the factors used for meters3and beyond appear to be very high Page 16 Mxuxrnerdc crwmrr Vc

18 Fairness and Equity for Leakage 1ICost Recovery As water flows through the system leakage occurs in the City s distribution system in 2007 approximately 15 of water purchased from the Region was lost due to leakage Therefore in order for the City to recoup the costs necessary to pay the Region it is necessary to gross up the amount charged by the Region to the consumer using the City s retail consumption Therefore although the City paid05120 per m3 for water to the Region consumers are charged06024 per m3 to generate sufficient revenues to balance the Regional requirements The situation in sewers is worse in that during rainstorms water flows into the sewer system as well as infiltration groundwater As a result the Region processes approximately 29 more sewage than what is registered on the meter Therefore the Region bills the City06130 per m3 for sewage treatment and in order to recover enough revenues due to the increase caused by inflow and infiltration charges per m3 on the volumetric rates The following table provides the total leakage and inflow and infiltration in 2007 of59 million As identified in the Loudon Report 1of the customers 294 ICI customers use 45 of consumption As such1 of the customers are required to contribute26 million towards the cost of leakage andibut this is not reflective of the actual costs attributed to this sector These losses are recovered through the volumetric rate therefore large volumetric users pay the bulk of the costs The remaining 99 of customers use 55 of the total usage It can be argued that these leakage andicosts are not related to volumes consumed but are more related to the IQngth of pipe attributed to each customer class These costs are related to infrastructure watermains and sewage collection problems of which there are proportionally significantly more kilometers of pipe in the Residential class relative to the volumes consumed compared with the ICI class A more fair and equitable approach would be to recover these costs by customer class Page 17

19 To illustrate this situation where similar information was not readily available for the City of Niagara Falls the following graphics reflect the situation in the City of London Comparison of Residential and Industrial Pipe Distribution Residential STORM SEWERS Non Residential SANITARY SEWERS WATERMAINS

20 One of the objectives of the rate review is to recommend a rate structure that best satisfies the public concerns However the report appears to be heavily weighted on the residential perspective particularly one resident with limited consideration for the ICI sector or other positions Public accountability means that rates and expenditures should be designed in ways that are clear to taxpayers so that policymakers can be made accountable to the taxpayers for the services they deliver and the costs they incur The more direct the relationship between the beneficiaries of a government service and payment for that service the greater the degree of accountability Matching taxes and user fees with beneficiaries increases the level of accountability people know what they are getting for the tax paid or fee charged and are better able to judge whether the expenditure level is appropriate Financing Water Infrastructure The Walkerton Inquiry A balanced and objective approach is needed particularly given that the ICI sector plays a more significant role in Niagara Falls due to a larger ICI sector than the majority of other municipalities in Ontario The Loudon Report appropriately recommends the differentiation of costs to be recovered through the fixed service charge based on the size of the meter which is a proxy for customer class as described above however it does not do so for the volumetric charge Again this negatively impacts large users and raises issues with respect to fairness and equity and public accountability particularly in light of the fact that as shown previously a significantly greater percentage of infrastructure costs are related to the residential sector Loudon recommends using a uniform volumetric charge to recover operating costs as well as some fixed costs that have been allocated to volumetric In light of this the following provides some alternative options that should be considered with respect to the volumetric rate Declining Block Rate Utilities may consider using a declining block rate structure when A single rate structure is used for all customer classes of service System costs decline with increasing water usageie economies of scale Page 19 Mr7rt yprl tr1xvahrx hk

21 A declining or decreasing block rate is a rate structure in which the unit price of each succeeding block of usage is charged at a lower rate than the previous block s As stated in the Principles of Water Rates Fees and Charges by AWWA Manual of Water Supply Practices as with any rate structure the declining block rate can be appropriate given certain situations and cost considerations In effect this type of rate structure provides an indirect way of allocating costs to different customer classes whose unit cost of service may vary For example the block rate can be set at thresholds to coincide with usage patterns of a typical large ICI user thereby charging them less per unit as consumption passes a set threshold An initial block may be designed to recover costs associated with the volumetric use and demand requirements of residential and small commercial customers An approach used in some municipalities including the Region of Durham the City of London the Town of Grimsby the City of Thorold the City of North Bay and the City of Thunder Bay is to use a declining rate structure This is generally implemented to recognize economies of scale whereby larger users are serviced by fewer though larger pipes which should be recognized in the revenue recovery The approach is that the basic rate pays the majority of the infrastructure cost while the additional volumes consumed are charged on an incremental basis This structure is designed to reflect the fact that at a certain level of consumption the cost of providing the service decreasesiethe fixed costs of the utility not included in the fixed service charge have already been met The infrastructure to service large water customers is proportionately less expensive than medium or small customers A declining block rate structure is suggested so that all customers pay the basic rate up to a threshold to cover off the infrastructure cost and then for customers using more than the threshold a lower rate is charged to cover off the incremental cost for services that vary with volumes consumed With respect to the treatment of large water users fairness and equity CWWA makes the following comments The issue of how to treat water users is a central concern On the one hand large water users generally impose significant average demands on a municipal water utility On the other hand they also impose more limited peaking requirements on the system relative to residential users A case can be made for lower rates for larger users due to both economies of scale and probable lower peak demands Page 20 McftiClr gmentcunurlir e VX

22 The following summarizes the advantages of a Declining proposed principles Block Rate against the report s Fairness and Equity A declining block rate may be used to develop a single rate schedule that takes into account the different cost and usage characteristics of all customers yet is equitable to all customers Declining block structures are not designed to provide quantity discounts or lower rates simply because water is sold in large volumes The declining block rate structure offers a mechanism to recover cost differences based on class water use and demand characteristics in a fair and equitable manner Revenue Adequacy and Security A properly designed declining block rate should be able to adequately meet target revenue levels of the design Simplicity For the most part the declining block rate schedule is fairly easy for the customer to understand and for the utility to administer Conservation As stated by AWWA a declining block rate structure appears to conflict with the goals of efficient water use and resource conservation Because declining block rates may be perceived as promoting consumption rather than conservation they are often viewed negatively in regard to conservation Many customers unfamiliar with the rate design process consider the declining block rate structure to be a quantity discount or anti conservation and favourable to large volume users of water In actuality when properly designed the declining block rate structure reflects the manner in which costs are incurred by the utility It assesses costs associated with the usage patterns and demand requirements of the various classes of customers served The Loudon Report does not provide sufficient evidence as to why a declining block structure was not recommended to recognize the difference in costs related to each property class particularly in light of the fact that a larger portion of fixed costs are being recommended to be recovered through the volumetric rate Page 21 MxoyrnrenlCt sxmir Mac

23 Alignment with Economic Development Initiatives Urban Metrics Inc was hired to prepare a comprehensive review of long term residential and employment land needs for the City of Niagara falls As stated in their report Niagara Region is widely considered to be amongst the most vibrant economic areas of the country In 2007 the Conference Board of Canada rated Niagara Region as the fourth fastest growing economy in the country behind Calgary Edmonton and Vancouver The has been and continues to be a major contributor to the overall economic prosperity of the Region The tourism sector continues to be the main economic driver New attractions such as the Fairview Casino Great Wolf Lodge and the other major reinvestment initiatives taking place across virtually all segments of the hospitality sector have helped to re position and invigorate Niagara sbrand as amust seedestination on the world stage New investment in the sector combined with other on going and planned infrastructure projects throughout the Region will have a significant impact on future economic spending patterns providing additional and sustained growth stimulus for both businesses and households alike While the tourism and service sector continue to gain ground other sectors have not kept pace Over the 1991 to 2001 period Niagara Falls shed nearly1700 manufacturing jobs This represents a reduction of more thanone third of all jobs in that sector alone Over the next five years the prospects for manufacturing employment remain below par Based on the Conference Board of Canada s2007 Metropolitan Outlook Niagara Region is expected to see more than4000 jobs eliminated from the manufacturing sector Moreover these losses are not expected to be off set by the new job growth in other complementary sectors that traditionally locate within industrial areas such as transportation construction wholesale trade and other large space extensive businesses Due consideration is needed in terms of the fairness and equity of the recommended approach The recommended rate structure supports affordability from a residential perspective as much of the fixed costs have been transferred to ICI sector through a volumetric charge As stated above the ICI sector in general plays a vital role in the local economy The manufacturing sector has already been hard hit as stated in the Urban Metrics Inc report and is expected to see further declines in job growth and the tourism industry is beginning to feel impacts of a softening economy The recommendations in the Loudon report will have further negative impacts to these sectors As stated in the Loudon Report the top 10 top users consume 18 of total consumption but as demonstrated previously these users will be required to contribute a disproportionate share of capital infrastructure costs Page 22 Mcx xfgtfn recd Ccs xafr Mic

24 Regional Rate Structure Review The Region of Niagara is in the process of reviewing its wholesale rate structure which will directly impact on City s retail rates As such it may be prudent to wait until the results of the Region sstudy are complete and the impact of any recommended changes are known prior to implementing a new retail rate structure in the City This will avoid temporary fluctuations Pago 23