Comprehensive Water Rate Study

Transcription

1 Final Report Dublin San Ramon Services District Comprehensive Water Rate Study January 213 Prepared by: HDR Engineering, Inc.

2 January 1, 213 Ms. Lori Rose Financial Services Manager Dublin San Ramon Services District 751 Dublin Blvd. Dublin, California Subject: Comprehensive Water Rate Study Dear Ms. Rose: HDR Engineering, Inc. (HDR) is pleased to present our final report on the comprehensive water rate study conducted for the Dublin San Ramon Services District (District). In developing this study, a key objective was to establish water rates sufficient to meet the District s projected financial obligations. This study has been developed utilizing generally accepted water rate-setting techniques. The District s records and information were the key inputs into this study. The technical analyses developed herein provide the basis for the development of fair and equitable water rates for the District. The proposed rates, as developed herein, are based upon estimates and projections of future costs, anticipated customer consumption and events. As those future costs, customer consumption and events vary from the projections contained herein, the District may need to adjust their rates in the future to reflect any significant differences between the projections contained herein and the actual costs incurred. Given that, the District should closely monitor their revenues, costs and capital plans against this study to determine in a timely manner any significant variances and then take appropriate management and Board action to reconcile any major differences. We appreciate the assistance provided by the District s staff in the development of this study. More importantly, we appreciate our long-term relationship with the District. Sincerely yours, HDR Engineering, Inc. Tom Gould Vice President Shawn Koorn Associate Vice President

3 Table of Contents Executive Summary Introduction...1 Overview of the Rate Study Process...1 Generally Accepted Rate Setting Principles... 1 Key Water Rate Study Results...2 Summary of the Revenue Requirement Analysis...2 Summary of the Cost of Service Analysis... 3 Summary of the Present and Proposed Water Rates... 4 Summary of the Water Shortage Rate Designs...7 Summary of the Study Introduction 1.1 Introduction Overview of the Rate Study Process Report Organization Summary Overview of Utility Rate Setting Process 2.1 Introduction Generally Accepted Rate Setting Principles Types of Utilities Determining the Revenue Requirement Overview of the Cost Allocation Procedures Economic Theory and Rate Setting Summary Development of the Revenue Requirement Analysis 3.1 Introduction Determining the Water Utility Revenue Requirement Determination of the Time Period and Method of Accumulating Costs Projection of Water Sales (Volumes) Water Rate and Other Miscellaneous Revenues Projection of Water Operation and Maintenance Expenses Projection of Water Capital Improvement Projects and Funding Projection of Debt Service Payments Transfer of Funds Summary of the Water Revenue Requirement Conclusions and Recommendations Summary Development of the Cost of Service Analysis 4.1 Introduction Objectives of a Cost of Service Study i Table of Contents Dublin San Ramon Services District i

4 4.3 Determining Customer Classes of Service General Cost of Service Procedures Functionalization and Classification of Water Plant in Service Funtionalization and Classification of Operating Expenses Major Assumptions of the Cost of Service Analysis Summary of the Cost of Service Results Conclusions and Recommendations Summary Development of the Rate Design Analysis 5.1 Introduction Rate Design Criteria and Considerations Current Industry Thinking and Trends Overview of the Rate Design Process Review of the Overall Rate Adjustment Present and Proposed Rate Structures Development of the Water Shortage Rates Summary Technical Appendices ii Table of Contents ii Dublin San Ramon Services District

5 Executive Summary Introduction Dublin San Ramon Services District (District) retained HDR Engineering, Inc. (HDR) to develop a comprehensive water rate study. The District and HDR jointly developed the revenue requirement analysis which was then used by HDR to develop the cost of service analysis and subsequent rate designs. In accordance to direction provided by the Board a key to this study was the development of water rates that enhanced the revenue stability of the District s current rates.. Overview of the Rate Study Process A comprehensive water rate study is based on a three step process. First, the overall level of revenue needs is determined, next the costs are allocated between the various customer classes of service, and finally rates are designed to meet the revenue needs of each customer class of service. Figure ES-1 provides an overview of these analyses. Figure ES-1 Overview of the Comprehensive Rate Analyses Revenue Requirement Analysis Cost of Service Analysis Compares the revenues to the expenses of the utility to determine the overall rate adjustment required Allocates the revenue requirement to the various customer classes of service in a fair and equitable" manner Rate Design Analysis Considers both the level and structure of the rate design to collect the target level of revenues As a part of this study, HDR assisted the District s staff in developing the revenue requirement analysis. Based on the revenue requirement, HDR developed the cost of service analysis which equitably allocated the costs to the various customer classes of service. Based on the results of the revenue requirement and cost of service analyses, HDR developed the proposed normal rates and water shortage rates. In conducting these analyses, HDR utilized generally accepted rate setting techniques and industry best practices in the development of the District s study. Executive Summary 1

6 Generally Accepted Rate Setting Principles As a practical matter, utilities should consider setting their rates around some generally accepted or global principles and guidelines. Utility rates should be: Cost-based, equitable, and set at a level that meets the utility s full revenue requirement Easy to understand and administer Designed to conform with generally accepted rate setting techniques Stable in their ability to provide adequate revenues for meeting the utility s financial, operating, and regulatory requirements Established at a level that is stable from year-to-year Historically, the District has used these basic rate setting principles to establish their rates. For this study additional emphasis was placed on enhancing the revenue stability of rates given variable consumption related to water shortage conditions into the future and declining consumption due to increasing conservation over the last several years. Key Water Rate Study Results Based on the technical analysis undertaken as part of this study, the following findings, conclusions, and recommendations were noted. A 1-year time period was used to analyze the adequacy of the rate structure. A goal of the rate design analysis was to enhance the revenue stability of the current rate structure: The analysis included the prudent funding of replacement fund capital projects for District assets as well as the District s share of assets in the DERWA Joint Powers Agency. The analysis reflects the enterprise funds responsibility for the rate payer portion of outstanding debt as previously decided by the Board. Rate adjustments are necessary over the 1-year period to ensure that the District meets minimum debt service coverage ratios and to maintain the District s excellent credit ratings. Rates were developed for the various Water Shortage stages. The single-family rate structure was revised to better reflect customer consumption patterns and to reflect the increased fixed service charge There are no new debt issues projected to be needed over the ten year period studied. Minor cost of service differences exist between the various classes of service. Proposed rates were developed for FYE 214. Summary of the Revenue Requirement Analysis A revenue requirement analysis sums a utility s operating and capital expenses and compares it to the total revenues of the utility to determine the overall rate adjustment required. This analysis determines the adequacy of the District s overall water rates. From this analysis, a determination can be made as to the overall level of water rate adjustment needed to provide adequate and prudent funding for both operating and capital needs. Executive Summary 2

7 For the District s study, the revenue requirement was developed for the 1-year time period of through 223. In accumulating revenues and expenses for the revenue requirements, a cash basis methodology was utilized. This is a generally-accepted methodology for calculating revenue requirements and the District has used this methodology in the past to establish their water rates. Revenues and expenses were projected by District staff and reviewed by HDR for reasonableness; after review and discussion with District staff HDR concurs with the projections. The Amended Budget has been adjusted to reflect additional anticipated expenses: the major items are outlined elsewhere in this report. Shown below in Table ES-1 is the summary of the Budget Year 213 revenue requirement analysis. Table ES-1 Summary of the District s Amended 213 Budget Revenue Requirement ($) Revenue Requirement Component 213 Sources of Funds - Rate Revenues at Stage 1 Rates $6,428 Revenues from Temporary Infrastructure Charge (TIC) 1,422 Recycled Water 2,576 Other Miscellaneous Revenue 1,43 Total Sources of Funds $11,469 Applications of Funds - Water Operations Personnel Services $4,311 Other Materials and Supplies 253 Contract Services 98 Other Expenses 3,25 Total Water Operations Expenses $8,497 Debt Service [1] 1,29 Transfer of Funds for Infrastructure Replacement [2] 2,415 Total Revenue Requirements $11,94 Deficiency of Funds ($471) [1] Reflects the rate payer share of the outstanding debt as well as revenues necessary to maintain required debt service coverage ratios. [2] Includes funds for District R&R and DERWA R&R As can be seen from Table ES-1, the District is projected to operate at a deficiency of approximately $471,. This is driven by several key issues. First, the District must maintain adequate debt service coverage ratios in order to meet current bonded debt covenants and to be able to issue debt in the future. Second is the funding of the rate existing rate payers share of annual debt service payments. Third is maintaining adequate renewal and replacement funding for the existing potable and recycled water system. Replacement for the District s share of the DERWA recycled water assets is a new component of the rates. In prior years, while DERWA was being built and in a start up mode replacement transfers were not made for those assets. The combination of these three key rate drivers results in the need to increase revenues by approximately $471, per year. Given these results, it is recommended that 1 FYE 213 was used to start the period because this is the last year for which there exists an adopted budget Executive Summary 3

8 the District increase current rate levels by approximately $471, per year to implement policy decisions previously made by the Board and to ensure the District can sustainably meet its bond coverage requirements while at the same time prudently and properly funding the operation of the District s water utility. As noted, the revenue requirement was developed for a 1-year period. Provided in Section 3 is a more detailed discussion of the revenue requirement along with a summary of the 1-year revenue requirement. Summary of the Cost of Service Analysis A cost of service analysis determines the equitable allocation of the revenue requirement to the various customer classes of service. The objective of the cost of service analysis is different from determining the revenue requirement. A revenue requirement analysis determines the utility s overall financial needs, while the cost of service analysis determines the fair and equitable manner to collect that revenue requirement. A summary of the cost of service analysis for FYE 214 is shown in Table ES-2. The FYE 214 test period is used as it is the time period that rates will ultimately be set for. Table ES-2 Summary of the Cost of Service Analysis 214 Test Period ($s) Class of Service Present Rate Revenues Allocated Costs $ Difference % Difference Single Family $3,847,972 $4,19,287 $261, % Commercial 1,584,349 1,546,237 (38,112) -2.4% Irrigation 963,91 1,53,47 89, % Private Fire Protection 78,786 8,89 2,14 2.7% Total $6,474,199 $6,789,462 $315, % The FYE 214 test period cost of service analysis results indicate minor cost of service differences between the customer classes of service. A simple guideline in dealing with cost of service results is that a customer class is paying their fair allocation of costs if the costs of service results for that customer group are within ±5% of the overall adjustment (4.9%). The customer class that is outside of the typical rule is the commercial class of service. The commercial results show a lower than average overall rate adjustment. This appears to be the result of lower peak demands as a class. This may be the results of separate irrigation (outdoor watering) accounts for commercial customers. Given the minor differences in the cost of service results, the need for a rate adjustment, and the goal to increase revenue stability, it was determined that no cost of service adjustments would be made at this time. In addition, this is the first cost of service study completed for the District since 23 and reflects the use of current generally accepted cost allocation methodologies. While no direct cost of service adjustments are being recommended, the proposed rate structure will potentially move customers closer to the cost of service results. Section 4 of this report provides a more detailed review of the cost of service analysis. Executive Summary 4

9 Summary of the Present and Proposed Water Rates The final step of the comprehensive water rate study process is the design of water rates to collect the desired levels of revenue, based on the results of the revenue requirement and cost of service analysis.. Both water rates and drought rates were developed for the District as part of this study Rate Transition Plan The results of the revenue requirement analysis indicated the need to increase rates for the FYE 214 rate period. While no cost of service adjustments are proposed at this time, the proposed rates were developed with the potential to move customers to a more cost-based level. A key element of this study was the enhancement of the revenue stability of the current rate structure given the variability of supply (different water shortage stages in differing years) and the decline in overall water consumption over the last several years. Over the past several years consumption has leveled off and additional declines in consumption may not occur. Given that, the proposed rates are based on this new level of consumption. Based on the analysis, and rate design goals and objectives, the proposed rates for FYE 214 were developed. It should be noted that the District s rates are currently set at drought stage 1. In addition, the District s customers are also charged the Temporary Infrastructure Charge (TIC). For purposes of setting rates for FYE 214, the District has proposed that rates be set at the normal level (no drought surcharge) given the availability of water in the near-term. In addition, the TIC charge will not be included as part of the proposed rate structure. To meet the goal of enhancing revenue stability, the proposed rate structure has increased the bimonthly basic charge to reflect the fixed costs the District incurs regardless of water consumption. By increasing the basic charge, and decreasing the consumption charge, the bill impacts to the average customer is minimized when compared to the current bill (which includes drought stage 1 rates and TIC charges). Single-Family Water Rate Design The proposed residential rate structure has been revised to meet the District s current rate design goals and objectives. While the general rate structure was maintained, the proposed rate structure decreased the size of the first block. The end of the second block remains the same as does the third block. In addition, the service charge for the proposed rate structure has been increased to increase the revenue stability of the rate structure. The revisions to the block sizes were to provide a lower cost first block for essential needs and low water users as the service charges are increasing. Provided below in Table ES-3 is a summary of the present and proposed single-family rates. Executive Summary 5

10 Table ES-3 Summary of the Present and Proposed Single-Family Water Rate Design Present Single-Family Rate [1,2] Proposed Single-Family Rate [2] Bi-Monthly Service Charge [3] 5/8 $ / / Consumption Charges - $/CCF [4] 2 CCF $ CCF $1.26 Over 34 CCF $1.49 Bi-Monthly Service Charge 5/8 $ / / Consumption Charges - $/ CCF 1 CCF $ CCF $1.5 Over 34 CCF $1.4 [1] Adopted 213 Rates. [2] Rate summary does not include the Zone 7 consumption charges, or the energy charge when applicable, which are included on the customer bill [3] Current Bi-Monthly Charge includes the Temporary Infrastructure Charge (TIC) [4] Present consumption charges reflect the current consumption charges for Water Shortage Stage 1 which is the stage the District has been in since July 29 and which approximates projected consumption levels under normal conditions (non- water shortage) in the future Given the increased service charge, the consumption charges were decreased to collect the target revenue level. By increasing the service charge, and decreasing the consumption charge, the goal of increasing the revenue stability of the current rate structure has been met. This will help minimize large swings in revenues received by the District during times of decreased consumption. As noted, Table 5-2 does not include the Zone 7 consumption charge, which is currently set at $2.27 per CCF, as the Zone 7 charge is designed to be a passthrough cost from the District. The proposed rate design is cost-based in that it is designed to collect the specific revenue requirement of the residential class of service. Present and Proposed Bi-Monthly Single-Family Bill Comparison with 5/8" meter - Consumption in CCF $2. $15. $1. $5. $. ($5.) Present Bill $41.92 $57.72 $73.52 $89.32 $16.97 $ $161.3 Proposed Bill $45.6 $59.45 $76.5 $92.65 $19.25 $ $ Bill Difference $3.68 $1.73 $2.53 $3.33 $2.28 $1.23 ($.15) The bill comparison developed for this class of service shows the impacts of the proposed rate structure, which includes the Zone 7 consumption charge. However, given the overall increase in revenue needs, the bill impact varies based on consumption. In reviewing customer consumption data, approximately 1% of the residential customers use less than 1 ccf bi-monthly, 7% use more than 1 ccf but less than 34 ccf bi-monthly, and the remaining 2% use more than 34 ccf bi-monthly. This rate structure provides additional revenues stability, but still maintains the conservation incentive. Executive Summary 6

11 Commercial Water Rate Design The proposed rate for the commercial customers, which includes all commercial customers, schools, and master-metered multi-residential includes the same fixed service charge as residential customers and a seasonal consumption charge. Presented in Table ES-4 are the present and proposed commercial rates. Table ES-4 Summary of the Present and Proposed Commercial Water Rate Design Present Commercial Rate [1,2] Proposed Commercial [2] Bi-Monthly Service Charge [3] 5/8 $ / / , , , , Consumption Charges - $/CCF [4] Winter (Nov. April) $1.4 Summer (May Oct.) $1.45 Bi-Monthly Service Charge 5/8 $ / / , , , , Consumption Charges - $/CCF Winter (Nov. April) $1. Summer (May Oct.) $1.2 [1] Adopted 213 Rates. [2] Rate summary does not include the Zone 7 consumption charges, or the energy charge when applicable, which are included on the customer bill [3] Current Bi-Monthly Charge includes the Temporary Infrastructure Charge (TIC) [4] Present consumption charges reflect the current consumption charges for Drought Stage 1 Similar to the residential rate structure, the bi-monthly service charge was increased to meet the revenue stability goal for the rate design process. Given the increase in the service charge, the consumption charges were adjusted to collect the target revenues from the commercial class of service. Similar to the residential summary, the Zone 7 wholesale water is a passthrough rate and included on the customers bill. Potable Irrigation Water Rate Design The potable irrigation rate is based on the third block of the single-family rate structure. The rate includes both the fixed service charge and the consumption charge. Provided in Table ES- 5 is a summary of the present and proposed potable irrigation rate. Executive Summary 7

12 Table ES-5 Summary of the Present and Proposed Potable Irrigation Water Rate Design Present Potable Irrigation Rate [1,2] Proposed Potable Irrigation Rate [2] Bi-Monthly Service Charge [3] 5/8 $ / / , , , , Consumption Charges - $/CCF [4] All Consumption $1.53 Bi-Monthly Service Charge 5/8 $ / / , , , , Consumption Charges - $/CCF All Consumption $1.4 [1] Adopted 213 Rates. [2] Rate summary does not include the Zone 7 consumption charges, or energy charge when applicable, which are included on the customer bill [3] Current Bi-Monthly Charge includes the Temporary Infrastructure Charge (TIC) [4] Present consumption charges reflect the current consumption charges for Drought Stage 1 Similar to the single-family and commercial rate structures, the potable irrigation rate structure reflects the increased fixed service charge. The consumption charges have been adjusted to reflect the revenues that should be collected from the potable irrigation class of service. As with the previous rate structures, the proposed rates are in addition to the Zone 7 charges which are directly billed to the customers on their bill Summary of the Water Shortage Rates The proposed water rates `assume normal water conditions. The normal water conditions were based on the 211 annual consumption; data through December 212 shows this is remains an accurate statement. This level of consumption is considered the typical water consumption given the leveling off of the decline in water consumption. It is assumed that no additional declines in consumption will occur in the future under normal rate levels. This is the most critical assumption in the report and the District should carefully monitor it and consider adjustments to water rates if a trend develops. Under water shortage or drought conditions, the District will need to have customers reduce their consumption and provide sufficient conservation savings to meet the District s supply conditions under the various stages of drought while still maintaining adequate cash flow. The following will provide a summary of the drought rates developed for the District For purposes of establishing water shortage rates, four stages for water shortage and a target water savings for each stage were established. These water shortage stages are summarized below. Executive Summary 8

13 Stage 1 Minimal Shortage: Target 1% water savings Stage 2 Moderate Shortage: Target 2% water savings Stage 3 Severe Shortage: Target 35% water savings Stage 4 Critical Shortage: Target 5% water savings To achieve these water savings under each stage, the District would take a number of different actions. The targeted water savings would be achieved via a combination of voluntary savings and savings achieved via price signals (i.e., as the price increases, consumption will be reduced). A customer s responsiveness to price will vary based upon a number of different factors (e.g., price levels, targeted block of consumption, income level of the customer, perception of the need for conservation savings). In developing the water shortage surcharges HDR has assumed that under each stage there will be some level of voluntary savings by the customers based on education and individual conservation practices. The remaining savings will need to be achieved through price incentives and price elasticity, responsiveness to changes in price. Provided below in Table ES- 6 is a summary of the assumptions regarding voluntary versus price induced savings. Table ES-6 Summary of the Estimated Voluntary Versus Price Induced Conservation Savings Normal Water Conditions Minimal Shortage Stage 1 Moderate Shortage Stage 2 Severe Shortage Stage 3 Critical Shortage Stage 4 Targeted Reduction Goal % 1% 2% 35% 5% Voluntary Savings.% 1.% 1.% 2.% 25.% Price Induced Savings.%.% 1.% 15.% 25.% Total Targeted Conservation Savings.% 1.% 2.% 35.% 5.% At the same time, the District would anticipate incurring additional expenses as a result of each stage of the water shortage. These additional expenses will be incurred for items such as advertising and notification, additional pumping/electrical costs, additional or emergency supply purchases, increased leak detection and repair, etc. As a part of developing the water shortage surcharges these additional or incremental costs have been considered and factored into the surcharges to attempt to minimize the financial impacts of these incremental costs. In developing the water shortage rates, the service charge remains fixed at the same level regardless of the water shortage stage. For purposes of this discussion, it is also assumed that the Zone 7 rate is also fixed. Therefore, the portion of the water rate impacted by the water shortage rate is the District s volumetric portion of the water rate. Residential Water Shortage Rates As noted above, the local District portion of the volumetric rate is the focus of this discussion. Presented below in Table ES-7 is a summary of the water shortage rates for the residential customers. Executive Summary 9

14 Table ES-7 Water Shortage Rate Options Residential Customers Water Shortage Rate - $/CCF Normal Minimal Moderate Severe Critical Water Shortage Shortage Shortage Shortage Conditions Stage 1 Stage 2 Stage 3 Stage 4 Targeted Reduction Goal % 1% 2% 35% 5% Block 1: 1 CCF $.5 $.56 $.625 $.875 $1.275 Block 2: CCF Block 3: Over 34 CCF The above rates are to be charged in addition to the Zone 7 purchased water rate and the fixed bi-monthly service charge. In moving from normal water conditions, the rate shown for each stage and block is the rate charged to the customer. As the District declares a water shortage stage the rates would automatically adjust and reflect that stage. Table ES-8 shows a comparison of the bill assuming a customer does, and does not, adjust their consumption in response to the water shortage. The bill does not include the Zone 7 charge in the calculation. Table ES-8 Residential Water Shortage Bill Impacts at Varying Levels of Consumption Total Bi-Monthly Bill Normal Minimal Moderate Severe Critical Water Shortage Shortage Shortage Shortage Conditions Stage 1 Stage 2 Stage 3 Stage 4 Targeted Reduction Goal % 1% 2% 35% 5% Customer Using 16 CCF Assuming No Change in Use 16 CCF $43.5 $45.27 $47.78 $53.1 $64.96 Assuming Reduced Usage Revised CCF Usage Total Bi-Monthly Bill $43.5 $42.63 $42.89 $4.5 $41.95 Customer Using 26 CCF Assuming No Change in Use 26 CCF $53.55 $58.47 $64.8 $74.1 $99.6 Assuming Reduced Usage Revised CCF Usage Total Bi-Monthly Bill $53.55 $54.51 $55.93 $55.2 $54.73 Customer Using 36 CCF Assuming No Change in Use 36 CCF $64.75 $72.67 $82.58 $98.74 $ Assuming Reduced Usage Revised CCF Usage Total Bi-Monthly Bill $64.75 $66.39 $68.97 $67.8 $71.78 Executive Summary 1

15 As can be seen in the above table, if a customer does not modify their consumption, their utility bill will increase substantially. In contrast to this, a customer that does reduce their consumption should not see a significant change in their bill. Commercial Water Shortage Rates The development of the water shortage rates for the commercial customers is similar to the approach used for the single-family customers. Presented below in Table ES-9 is a summary of the water shortage rates for the commercial customers. Table ES-9 Water Shortage Rate Options Commercial Customers [1] Water Shortage Rate - $/CCF Normal Minimal Moderate Severe Critical Water Shortage Shortage Shortage Shortage Conditions Stage 1 Stage 2 Stage 3 Stage 4 Targeted Reduction Goal % 1% 2% 35% 5% Winter (November to April) $1. $1.9 $1.2 $1.51 $1.9 Summer (May October) [1] Includes commercial, institutional and master metered multi-family customers Potable Irrigation Water Shortage Rates The final water shortage rate developed was for the potable irrigation customers. Presented below in Table ES-1 are the proposed water shortage rates for the potable irrigation customers. Table ES-1 Water Shortage Rate Options Potable Irrigation Water Water Shortage Rate - $/CCF Normal Minimal Moderate Severe Critical Water Shortage Shortage Shortage Shortage Conditions Stage 1 Stage 2 Stage 3 Stage 4 Targeted Reduction Goal % 1% 2% 35% 5% All Consumptive Use $1.4 $1.82 $2.73 $3.92 $5.39 Summary of the Study This summarizes the technical analyses undertaken for the District. In summary the District s normal rates are deficient by approximately $2.4 million driven largely based on three recent policy decisions made and direction given by the Board: Allocating a portion of the water system debt to rate payers; Ensuring that the minimum bond coverage ratios are met by rate revenue; and Beginning to set aside a replacement allowance for the District s share of DERWA recycled water assets. Executive Summary 11

16 The results of the cost of service analysis showed minor cost differences between the various customer classes of service. Given the need for the rate adjustment, and minor cost of service adjustments, it is recommended that no cost of service adjustments be made. However, the proposed rates structure has the potential to move customers towards the cost of service results. Based on these analyses, proposed water rates, and water shortage rates, were developed for the various customer classes of service. A full and complete discussion of the development of the technical analyses and proposed rates can be found in following sections of this report. Executive Summary 12

17 Section 1 Introduction 1.1 Introduction Dublin San Ramon Services District (District) retained HDR Engineering, Inc. (HDR) to develop a comprehensive water rate study. The objective in conducting a comprehensive water rate study is to develop cost-based rates such that they meet the District s operation and maintenance (O&M) needs (including debt service and coverage ratios) as well as the improvement and replacement program of the utility. This study determined the adequacy of the existing water rates and provides the framework for any needed future adjustments. Rates set too low may result in insufficient funds to meet current financial and legal obligations and maintain system integrity and will threaten the District ability to meet its mission in the long term. This The objective in conducting comprehensive water rate study is to develop costbased rates such that they meet the District s operation and maintenance (O&M) needs as well as the capital improvement program of the utility. report describes the methodology, findings, and conclusions of the comprehensive water rate study process conducted for the District. 1.2 Overview of the Rate Study Process User rates must be set at a level where a utility s O&M and improvement and replacement expenses are met with the revenues received from customers. To evaluate the adequacy of the existing water rates, a comprehensive water rate study is often performed. A comprehensive water rate study consists of three interrelated analyses. Figure 1-1 provides an overview of these analyses. Figure 1-1 Overview of the Comprehensive Rate Analyses Revenue Requirement Analysis Cost of Service Analysis Compares the revenues to the expenses of the utility to determine the overall rate adjustment required Allocates the revenue requirement to the various customer classes of service in a fair and equitable" manner Rate Design Analysis Considers both the level and structure of the rate design to collect the target level of revenues Introduction 13

18 A revenue requirement analysis is concerned with the overall funding sources and expenses of the utility. From this analysis, a determination can be made as to the overall level of adjustment to rates. Next, a cost of service analysis is performed to equitably allocate the revenue requirement to the various types of customers served (e.g., residential, commercial). Finally, once an overall level of rate adjustment is determined and an equitable allocation of those costs, the last step of the rate study process is the design of rates to collect the appropriate level of revenues while considering the other rate design goals and objectives of the utility (e.g., revenue stability, conservation). At the same time HDR utilized generally accepted rate setting methodologies and practices in the development of the District s comprehensive water rate study. 1.3 Report Organization This report is organized as follows: Section 2 provides background information about the utility rate setting process. Section 3 reviews the revenue requirement analysis developed for the District. Section 4 reviews the cost of service analysis conducted for the District. Section 5 reviews the development of the proposed water rates. Section 6 reviews the proposed water shortage rates. A technical appendix is attached at the end of the report which provides the analyses used in the preparation of this report. 1.4 Summary This report will review the water rate analysis prepared for the Dublin San Ramon Services District. The next section of the report will discuss the generally accepted rate setting methodologies used in the development of this report. Introduction 14

19 Section 2 Overview of the Rate Setting Process 2.1 Introduction This section provides background information about the rate setting process, including descriptions of generally accepted principles, types of utilities, methods of determining revenue requirements and designing rates. This information is useful for gaining a better understanding of the details presented in later sections of this report. In developing and establishing utility rates, there are generally accepted principles or guidelines around which rates should be set. This section of In developing and the report provides a general overview of the methodology and establishing utility rates, guidelines used for setting cost-based rates for each of the there are generally utilities. This should give the reader a better understanding of accepted principles or the general process that is detailed later in this report. In guidelines around which addition, this section of the report discusses the issues of rates should be set. prudent financial planning and the use of written financial policies to aid in establishing the District s rates. 2.2 Generally Accepted Rate Setting Principles As a practical matter, utilities should consider setting their rates around some generally accepted or global principles and guidelines. Utility rates should be: Cost-based, equitable, and set at a level that meets the utility s full revenue requirement; Easy to understand and administer; Designed to conform with generally accepted rate setting techniques; Stable in their ability to provide adequate revenues for meeting the utility s financial, operating, and regulatory requirements; and Established at a level that is stable from year-to-year. These guiding principles were utilized within this study to help develop water rates that are cost-based and equitable. Overview of the Rate Setting Process 15

20 2.3 Types of Utilities Utilities are generally divided into two types: Public utilities are usually owned by a city, county, or special district, and are operated at zero profit over the long term although their may be surpluses or deficits in any given year. A public utility is locally owned since its customers are also its owners. As a point of reference, Dublin San Ramon Services District is a public utility. Public utilities are capitalized or financed by issuing debt and soliciting funds from customers through direct capital contributions or user rates. Public or municipal utilities are Public utilities are... theoretically operated at zero profit. As a point of reference, Dublin San Ramon Services District is a public utility. typically exempt from state and federal income taxes. A publicly elected board of directors regulates such a public utility. Private utilities are for profit enterprises and are owned by a private company and/or stockholders. The shareholders are, in essence, the owners of the private utility. Therefore, the owners of a private utility may not be customers or local citizens, but rather numerous individuals or shareholders spread across the United States and the world. A private utility is capitalized by issuing stock to the general public. Private utilities are taxable entities. Given their for profit status, their rates and operations are generally regulated by a state public utility commission or other regulatory body. Dublin San Ramon Services District is a public utility and the analysis developed within this report has been based on the methodology generally utilized by a public utility. 2.4 Determining the Revenue Requirement Because public and private utilities have very different administrative and financial characteristics, their methods differ for determining revenue requirement and setting rates Public Utilities Most public utilities use the cash basis approach for establishing their revenue requirement and setting rates. This approach conforms to most public utility budgetary requirements and the calculation is easy to understand. A public utility: Totals its cash expenditures for a period of time to determine required revenues. Adds operation and maintenance (O&M) expenses to any applicable taxes or transfer payments to determine total operating expenses. Operation and maintenance expenses include the materials, electricity, labor, supplies, etc. needed to keep the utility functioning. Calculates capital costs by adding debt service payments (principal and interest) to capital improvements financed with rate revenues. In lieu of including capital improvements financed with rate revenues, a utility sometimes includes depreciation expense to stabilize annual revenue requirement. Under the cash basis approach, the sum of the capital and operating expenses equals the utility s revenue requirement during any period of time (see Table 2-1). Overview of the Rate Setting Process 16

21 Note that the two portions of the capital expense component (debt service and capital improvements financed from rates) are necessary under the cash basis approach because utilities generally cannot finance all their capital facilities with long-term debt. Table 2-1 Cash versus Utility Basis Comparison Cash Basis Utility Basis (Accrual) + O&M Expense + O&M Expense + Taxes or Transfer Payments + Taxes or Transfer Payments + Capital Improvements Financed with Rate Revenues ( Depreciation Expense) + Depreciation Expense + Debt service (Principal + Interest) + Return on Investment = Total Revenue Requirement = Total Revenue Requirement Private Utilities Most private utilities use a utility basis or accrual approach for establishing revenue requirement and setting rates (see Table 2-1). A private utility typically: Totals its O&M expenses, taxes, and depreciation expense for a period of time. Depreciation of expenses is a means of recouping the cost of capital facilities over their useful lives and generating internal cash. Adds a fair return on investment. Private utilities must pay state and federal income taxes along with any applicable property, franchise, sales, or other form of revenue taxes. The return portion of this type of revenue requirement pays for the private utility s interest expense on indebtedness, provides funds for a return to the utility s shareholders in the form of dividends, and leaves a balance for retained earnings and cash flow purposes. 2.5 Overview of the Cost Allocation Procedures After the total revenue requirement has been quantified and determined, it is allocated to the users of the service in a manner that reflects the cost relationships incurred for the production and delivery of the services. This analytical exercise usually takes the form of a cost of service study. A cost of service study is a three-step approach. First, costs must be functionalized or grouped into the various cost categories related to the providing of service. For a water utility source of supply, treatment, transmission, and distribution are the typical categories. This step is largely accomplished by the utility s accounting system. The next step is the classification of the functionalized costs. Classification refers to the arrangement of the functionalized data into cost components. For a water utility these are typically capacity-related (peak demands), commodity-related (average demands), public fire protection-related and customer-related component costs. Once the costs are classified to the various cost components, the last step in the cost of service process is the allocation of the classified costs to each of the customer classes of service (e.g., residential, commercial). Each of the cost components are allocated to the various customer classes of service based on each customer class relative contribution to the specific cost component. For example, customer related costs are allocated proportionally Overview of the Rate Setting Process 17

22 to each class of service based upon the total number of customers in that class of service. Once the costs are allocated to each class of service, a measure of the required level of rate revenues from each class of service to achieve cost-based rates can be determined. 2.6 Economic Theory and Rate Design The design of the proposed water rates for adoption by the District concludes the rate study process. The rate design process utilizes the results of both the revenue requirement and cost of service analysis to develop rates that achieve the overall goals and objectives of the District. These goals and objectives may include consideration of cost-based rates, but may also consider items such as revenue stability, ability to pay, continuity of past rate philosophy, conservation (efficient use), encouragement of economic development, ease of administration, legal requirements, etc. It is important to understand that cost of service is only one goal or objective in designing final water rates, however, it is an important one. The District may take into consideration factors other than strictly cost of service in establishing the District s final water rates. While the general description of the utility rate setting process discussed in this section of the report is greatly simplified and abbreviated, it does however address the basic elements of contemporary regulatory thinking. One of the major justifications for a comprehensive rate study is founded in economic theory. Economic theory suggests that the price of a commodity must roughly equal its cost, if equity among customers is to be maintained. The implications of this statement on utility rate design are significant. For example, capacity-related costs are usually incurred by a water utility to meet peak use requirements. Thus, the customers causing peak demands should properly pay for the demand-related facilities in proportion to their contribution to maximum demands. Recent emphasis on seasonal and increasing block rate design is movement in a direction that embraces this economic concept. Through refinement of costing and pricing techniques, consumers of a product are given a more accurate price signal of what the commodity costs to produce and deliver. The above basic thoughts have considerable foundation in economic literature. They also serve as primary guidelines for rate design by most utility regulators and administrative agencies. This priceequals-cost concept will provide the basis for much of the subsequent analysis and comment. 2.7 Summary This section of the report has provided a brief introduction to the general principles, techniques, and economic theory used to set water rates. These principles and techniques will become the basis for the District s analysis. The next section of the report will review the development of the District s water revenue requirement. Overview of the Rate Setting Process 18

23 Section 3 Development of the Revenue Requirement 3.1 Introduction The revenue requirement analysis is the first step in developing the proposed rates for the District. This analysis determines the adequacy of the District s overall water rates. From this analysis, a determination can be made as to the overall level of water rate adjustment needed to provide adequate and prudent funding for both operating and capital needs. Typically, one of the main objectives of a water rate study is to develop fair and equitable rates while attempting to minimize the impacts to the utility s customers. This section of the report discusses the development of the water revenue requirement for the District. The results of the revenue requirement analysis will provide a framework around which to evaluate the adequacy of current rates. Provided below is a detailed discussion of the revenue requirement as developed by District staff, with assistance by HDR. 3.2 Determining the Water Utility Revenue Requirement The previous section of the report noted that there are two methodologies available to develop revenue requirements; the cash basis and the utility basis approach. The District has historically utilized the cash basis approach to establish their revenue requirements. For this study, the District has consistently utilized this same methodology. 3.3 Determination of the Time Period and Method of Accumulating Costs The initial step in calculating the revenue requirement was to establish a test period or time period around which the revenue requirement would be reviewed. For this particular study, the starting point for the revenue requirement was the District s FYE 213 budget period. This study has also projected costs out over 1-years to FYE 222. Reviewing a multi-year time period is generally recommended in an attempt to identify any major expenses that may be on the horizon. By anticipating future financial requirements the District can begin planning for these changes sooner, thereby, minimizing short-term water rate impacts and water rates over the long-term. The next step is to determine a method of accumulating costs. As noted above, for the District, the cash basis methodology was utilized. Shown below in Table 3-1 is a summary overview of the components within the District s cash basis revenue requirement methodology. Development of the Revenue Requirement Analysis 19

24 Table 3-1 Overview of the District s Cash Basis Revenue Requirement Methodology + Operation and Maintenance Expenses (Water Operations) Personnel Services Purchased Water (Zone 7) Materials and Supplies Contract Services Other Expenses + Debt Service Water Operations Debt + Transfer of Funds; Replacement Fund = Total Revenue Requirement Given this basic framework, the test period revenue requirements were developed for the projected test period. 3.4 Projection of Water Sales (Volumes) A particularly challenging component of this study is the projection of the water sales, or the volumes of water to be sold. The reason for this challenging aspect to the study is the District has seen declining sales volumes over the last several years. Understanding the reason(s) for this decline is complex and driven, in part, by customer behavior and consumer confidence in the economy. It is clear that a portion of the decline in usage has been driven by the District s conservation efforts and the installation and use of more efficient appliances (e.g., low-flow shower heads, low-flush toilets, etc.). This type or reason for the declining usage has been well documented in recent years in the water utility industry. 2 A recent article in the American Water Works Association (AWWA) Journal provided the following observation on this issue: Water utilities across North America are experiencing declining water sales among residential customers (single-family households). Typically, utility officials attribute the decline in water use to several possible factors, including wetter weather, new water conserving appliances, changing demographics, and classification anomalies; however, there is no clear understanding of the ratio of use each of these factors contributes to the over-all decline. 3 The District over the last few the last few years has seen this same trend. At the same time, the State of California has been operating in a water shortage condition, further pushing down sales in response to a call for conservation by local utilities and the District. The District has been operating in Stage 1 water shortage rates as a result of the 2,5, 2,3, 2,1, 1,9, 1,7, 1,5, Historical Calendar Year Residential Usag e ( CCF) 1,3, Residen tial Statewide Water shortage conditions. While the most recent data shows a slight increase in consumption, there is not sufficient data available to assume that consumption sales will 2 Among the more recent articles are: Declining Residential Water Use Presents Challenges, Opportunities, AWWA Opflow, May, 211; 3 Thomas D. Rockaway, Paul A. Coomes, Joshua Rivard and Barry Kornstein, Residential Water Use Trends in North America, AWWA Journal, February 211, p. 76. Development of the Revenue Requirement Analysis 2

25 increase going forward. As well as the Statewide mandate to reduce water consumption by 2% by 22 providing incentive to continuing to promote the need for conservation. Given the uncertainty in the economy, assuming a greater level of consumption than has been seen in recent years may result in under collection of revenues to meet the District s financial obligations. For purposes of this study, it has been assumed that residential consumption will level off at the current level of approximately 2.1 million CCF. The projected consumption of 2.1 million CCF relates to the time period of 21/11. The 2.1 million CCF is the lowest average of the last few years. This assumed volume of sales presumes that the conditions leading to the water shortage conditions have abated, but that customer behavior of efficient use and conservation will likely continue forward, at least for the next few years. 3.5 Water Rate and Other Miscellaneous Revenues The revenue requirement calculation begins with a projection of rate revenues at present rate levels. The revenue at present rates was calculated using the forecast of projected water sales and applying the existing rates. For 213, this resulted in total rate revenues of approximately $6.9 million. Over the 1-year projected time horizon, customer growth is expected to increase Projected FY 213 Rate Revenues () the rate revenues to approximately $8.7 million by $3, This projection assumes Single - Family only customer growth and no Multi - Family change in the existing rates. $144 $77 $1,141 $135 $94 $58 Commercial Schools Irrigation Fire Line FCI - Federal Priso n The water utility also receives a variety of miscellaneous revenues. The largest component of miscellaneous revenues is related to recycled water. At the present time, recycled water revenues are approximately $2.5 million and this is expected to increase to nearly $4. million by 222. By adopted Board policy, the recycled rates are based on the potable water rates, so as potable water rates change, recycled water rates change. Given this, recycled water rates are separated out from other rate revenues as they are dependent on potable rate levels. Also included in the miscellaneous revenue category are revenues such as interest income, Alameda County Jail charges (those rates are based on a contract), backflow fees, as well as other miscellaneous fees. In total, the miscellaneous revenue for 213 is projected to be $3.6 million, increasing over time to approximately $4.9 million in 223. In total, the District is projected to receive approximately $1.5 million in revenues in 213 and $13.9 million in Projection of Water Operation and Maintenance Expenses In general, operation and maintenance expenses are grouped into operational areas (See Table 3-1). Escalation factors were developed for the various types of expenses that the District incurs: labor, benefits, materials and supplies, equipment, miscellaneous and utilities. For the most part, the escalation factors were 3% per year (i.e. inflationary levels), with the exception of medical benefits and PERS/Retirement, in which the costs, in recent years, have been increasing at a rate which has exceeded inflationary levels. Given recent federal and Development of the Revenue Requirement Analysis 21

26 State legislation regarding health care and pensions these cost trends are uncertain and should be carefully monitored over the next few years A significant O&M expense item for the District is purchased water from Zone 7. For purposes of developing the revenue requirements, the Zone 7 purchased water costs have not been included within this analysis since by Board policy Zone 7 purchased water costs are separately detailed on customer bills. Given that, this revenue requirement analysis reflects only the local distribution costs associated with the District s system. As the most recently approved budget, the District s FYE 213 budgeted expenses were used as a starting point to project future O&M expenses. Future year projections were calculated by applying an applicable escalation factor. In projecting the District s O&M expenses it has been assumed that no extraordinary O&M will be incurred over this projected test period. In total, the District s water O&M expenditures are projected to range from $8.5 million in FYE 213 to $11.7 million in FYE Projection of Water Capital Improvement and Replacement Projects and Funding An important aspect of the water revenue requirement was the funding of capital improvements and replacements. The District segregates their capital improvements between the water replacement fund (61) and the water expansion fund (62). The purpose of segregating these funds is two-fold. First, these are two separate and distinct types of capital projects. The replacement fund is related to existing assets and the expansion fund is related to growth/expansion related projects. The District charges a capacity reserve fee for new customer s connecting to the system. By separately accounting for the use of these proceeds, the District is maintaining the appropriate and mandated linkage between the fees and the use of the proceeds. More importantly, the capacity reserve fees are segregated between existing facilities (buy-in component) and future expansion projects that provide expanded capacity for new development. The funds, as they are received, are then appropriately allocated to the two funds. The water replacement fund has a number of replacement projects planned over the next 1 years ( ). These projects are related to maintaining the existing system. These projects total, over the 1-year period, approximately $43. million. Provided in Table 3-2 is a summary of the replacement project funding based on the currently approved District Ten Year Capital Improvement Plan. A more detailed summary of the replacement fund can be found in the technical appendices in Exhibit 3A (It should be noted that the Ten Year Capital Improvement Plan and the resultant projected amounts are being updated as part of the District s current budget cycle. It is not anticipated that the changes will have a material impact on the funds over the planning period.) Table 3-3 provides a summary of the expansion capital improvement funding plan over the next 1-year period. These projects are related to expansion of the system to meet growth demands. Over the time period reviewed the expansion projects total $34. million. These projects are primarily funded through capacity reserve fees and long-term debt. However, over the time period reviewed funds from the enterprise fund are being used to fund a portion of the long-term debt that is related to past rate payer project. Development of the Revenue Requirement Analysis 22

27 Table 3-2 Overview of the Water Replacement Fund [61] ($) Description Beginning Replacement Fund Balance $9,471 $9,272 $7,22 $7,651 $1,71 $12,634 $14,96 $17,12 $16,41 $21,3 $24,26 Revenues Transfers from Enterprise Fund $2,415 $2,458 $2,51 $2,545 $2,59 $2,659 $2,76 $2,89 $2,97 $3,121 $3,198 Capacity Buy-In Fees 1, ,46 3,614 1,87 1,972 1,959 2,8 5,73 4,856 3,18 Other Misc. Revenue 1, Total Replacement Funds Avail. $14,816 $12,28 $12,871 $13,943 $15,337 $17,454 $19,911 $23,92 $24,466 $29,941 $31,368 Expenses Replacement O&M $464 $294 $31 $37 $316 $325 $335 $345 $355 $366 $377 Replacement Capital Projects 5,8 4,766 4,92 2,927 2,388 2,169 2,456 6,76 2,811 5,368 3,339 Replacement Fund Debt Service Total Replacement Fund Expenses $5,544 $5,6 $5,22 $3,233 $2,73 $2,494 $2,791 $7,51 $3,166 $5,734 $3,716 Ending Replacement Fund Balance $9,272 $7,22 $7,651 $1,71 $12,634 $14,96 $17,12 $16,41 $21,3 $24,26 $27,652 Table 3-3 Overview of the Water Expansion Fund [62] ($) Description Beginning Expansion Fund Balance $7,39 $6,319 $4,458 $9,111 $11,11 $7,47 $8,572 $7,479 $9,822 $2,767 $31,64 Revenues Transfers from Enterprise Fund $675 $675 $675 $675 $675 $675 $675 $675 $675 $675 $675 Capacity Reserve Fees 2,428 1,342 8,67 1,286 5,322 5,614 5,577 7,97 14,439 13,82 9,5 Other Misc. Revenue 1,8 1,149 1,177 1,261 1,267 1,286 1,349 1,447 1,652 2,192 2,489 Total Expansion Funds Avail. $11,15 $9,485 $14,979 $21,333 $18,275 $14,622 $16,172 $17,571 $26,588 $37,454 $43,818 Expenses Expansion O&M $749 $749 $765 $78 $84 $828 $853 $878 $95 $932 $96 Expansion Capital Projects 1,24 1,212 2,37 6,476 7,36 2,155 4,776 3,84 1,854 1,854 1,39 Expansion Fund Debt Service 2,841 3,67 3,66 3,65 3,64 3,67 3,65 3,67 3,62 3,64 3,61 Total Expansion Fund Expenses $4,83 $5,28 $5,868 $1,322 $11,228 $6,5 $8,694 $7,749 $5,82 $5,85 $5,33 Ending Expansion Fund Balance $6,319 $4,458 $9,111 $11,11 $7,47 $8,572 $7,479 $9,822 $2,767 $31,64 $38,488 Development of the Revenue Requirement Analysis 23

28 As noted previously, the District anticipates approximately $77. million in capital expenditures for the water utility over the ten-year period of Of the $77. million in projects, approximately $43. million is related to renewals and replacements and $34. million for growth related projects. 3.8 Projection of Debt Service Payments The District currently has one debt issue related to enterprise operations with no additional debt projected to be issued during the projected ten-year time period. However, in compliance with Board policy, a key driver in the rate study was the ability to maintain adequate debt service coverage ratios. As a result, a value has been included in the debt service category to maintain the required debt service coverage ratios which help maintain the District s ability to issue future long-term debt. 3.9 Transfer of Funds Two transfers are made from the enterprise fund. The first is to the District s Replacement and Improvement fund of approximately $2.5 million per year and represents the needed funding requirements for future projects related to existing assets. This transfer is for both District asset replacements as well as for DERWA asset replacements. The second transfer represents the enterprise fund s share of the 211 Water Bonds. This transfer of $675, annually is made to the Expansion fund from which the total debt payment is made. 3.1 Summary of the Water Revenue Requirement The above components and projections of the water revenue requirement are summed to develop the ten-year water revenue requirements for the District. In developing the final revenue requirements, consideration was given to the financial planning criteria of the District. In particular, emphasis was placed on minimizing rate increases, yet still providing adequate funds to support the District s O&M activities, meet debt coverage requirements, and fund repairs and improvements to existing infrastructure assets. In developing the revenue requirement, District s staff developed the projections of revenues and expenses for the review period. Shown below in Table 3-4 is the summary of the 213 revenue requirement analysis based on the amended 213 budget. As noted previously, Zone 7 water purchases, and revenues, are not included in the revenue requirement as those charges are pass through charges. Development of the Revenue Requirement Analysis 24

29 Table 3-4 Summary of the District s Amended 213 Budget Revenue Requirement ($) Revenue Requirement Component 213 Sources of Funds - Rate Revenues at Stage 1 Rates $6,428 Revenues from Temporary Infrastructure Charge (TIC) 1,422 Recycled Water 2,576 Other Miscellaneous Revenue 1,43 Total Sources of Funds $11,469 Applications of Funds - Water Operations Personnel Services $4,311 Other Materials and Supplies 253 Contract Services 98 Other Expenses 3,25 Total Water Operations Expenses $8,497 Debt Service [1] 1,29 Transfer of Funds for Infrastructure Replacement [2] 2,415 Total Revenue Requirements $11,94 Deficiency of Funds ($471) [1] Reflects the rate payer share of the outstanding debt as well as revenues necessary to maintain required debt service coverage ratios. [2] Includes funds for District R&R and DERWA R&R As noted, the revenue requirement was developed for a 1-year period. Provided below in Table 3-5 is a summary of the 1-year revenue requirement. Again, the analysis has excluded both the revenues and expenses related to Zone 7 water purchases and sales. Development of the Revenue Requirement Analysis 25

30 Table 3-5 Summary of the District s 1-Year Revenue Requirement ($) Sources of Funds - Revenues at Present Rates $6,428 $6,474 $6,693 $6,858 $6,935 $7,84 $7,187 $7,411 $7,761 $8,91 $8,259 Recycled Water 2,576 2,692 2,813 2,94 3,72 3,211 3,355 3,56 3,664 3,829 4,1 Temporary Infrastructure Charge 1,422 1,432 1,481 1,517 1,534 1,567 1,59 1,639 1,717 1,79 1,827 Other Miscellaneous Revenue 1,43 1,86 1,86 1,112 1,113 1,112 1,152 1,185 1,18 1,25 1,247 Total Sources of Funds $11,469 $11,685 $12,72 $12,428 $12,654 $12,974 $13,284 $13,741 $14,322 $14,959 $15,334 Applications of Funds - Water Operations Personnel Services $4,311 $4,496 $4,71 $4,91 $5,149 $5,42 $5,564 $5,731 $5,93 $6,8 $6,262 Other Materials and Supplies Contract Services ,5 1,32 1,63 1,145 1,179 Other Expenses 3,25 3,91 3,157 3,22 3,317 3,416 3,518 3,624 3,733 3,845 3,96 Total Water Operations Expenses $8,497 $8,723 $9,17 $9,354 $9,686 $1,75 $1,427 $1,69 $11,1 $11,391 $11,732 Debt Service [1] 1,29 1, Transfer of Funds [2] 2,415 2,458 2,51 2,545 2,59 2,659 2,76 2,89 2,97 3,121 3,198 Total Revenue Requirements $11,94 $12,21 $12,415 $12,684 $13,158 $13,682 $13,995 $14,173 $14,655 $15,187 $15,65 Deficiency of Funds ($471) ($516) ($343) ($256) ($53) ($78) ($712) ($432) ($333) ($227) ($272) [1] Reflects the rate payer share of the outstanding debt as well as revenues necessary to maintain required debt service coverage ratios. [2] Includes funds for District R&R and DERWA R&R As can be seen from Table 3-4 and Table 3-5 given recent policy decisions of the Board the District is currently operating at a deficiency of funds for the 1 year time period. This is driven by several key issues. First, the District must maintain adequate debt service coverage ratios in order to meet current bonded debt covenants, as well as to be able to issue debt in the future, second is the prudent funding of renewals and replacement, and finally, properly funding existing and future operation and maintenance expenses. The combination of these key rate drivers results in the need to increase revenues over the ten year period. Development of the Revenue Requirement Analysis 26

31 3.11 Conclusions and Recommendations Based on the analysis completed for the District, and given recent policy decisions made by the Board the water utility is operating at a deficiency over the 1-year period. Given these results, it is recommended that the District increase rates to reflect the prudent and proper funding of the District s utility Summary This section of the report has provided the results of the water revenue requirement as developed by the District staff, with technical assistance from HDR. This revenue requirement analysis becomes the starting point for the design of water rates to support the needed funding levels. The next section will discuss the development of the cost of service analysis. Development of the Revenue Requirement Analysis 27

32 Section 4 Development of the Cost of Service Analysis 4.1 Introduction In the previous section, the revenue requirement analysis focused on the total revenues necessary to prudently fund the District s O&M and capital needs. This section will discuss the cost of service analysis developed for the District. A cost of service analysis is concerned with the equitable allocation of the total revenue requirement between the various customer classes of service (e.g., residential, commercial). The previously developed revenue requirement was utilized in the development of the cost of service analysis. In recent years, increasing emphasis has been placed on cost of service studies by government agencies, customers, utility regulatory commissions, and other parties. This interest has been generated in part by continued inflationary trends, increased operating and capital expenditures, and concerns of equity in rates among customers. Following the generally-accepted guidelines and principles of a cost of service analysis will inherently lead to rates which are equitable, cost-based, and not viewed as arbitrary or capricious in nature. 4.2 Objectives of a Cost of Service Study There are two primary objectives in conducting a cost of service study: Allocate the revenue requirement among the customer classes of service Derive average unit costs for subsequent rate designs Following the generallyaccepted guidelines and principles of a cost of service analysis will inherently lead to rates which are equitable, cost-based, and not viewed as arbitrary or capricious in nature. The first objective of the water cost of service analysis is to determine the fair and equitable manner to collect the revenue requirement. This is accomplished by allocating the previously developed revenue requirement to the various customer classes of service based on usage characteristics and facility requirements of each class of service. The second rationale for conducting a cost of service analysis is to develop unit costs which can be used in the development of the final rate designs. The cost of service analysis provides a cost per unit of water consumption based on each customer class s equitable share of costs. For example, a water utility incurs costs related to flow, average day, peak day, fire protection, and customer-related cost components. A water utility must build sufficient capacity to meet summer peak capacity needs. The unit costs provide the relationship between these components which can then be used to set rates. 4.3 Determining Customer Classes of Service The first step in a cost of service analysis is to determine the customer classes of service. Currently, the District has three separate rate schedules which are single family, commercial, and irrigation. However, within the commercial class of service there is a wide range of customers with various consumption patterns and usage profiles. As a result, the commercial Development of the Cost of Service Analysis 28

33 class was split out into more detail to review the cost allocations to various major customer groups within the commercial class of service. This may not result in additional rate schedules being developed, but will provide the District with the information necessary to make future rate adjustments and rate schedules more equitable if necessary. Provided below are the classes of service used within the cost of service analysis: Single-Family Multi-Family Commercial Schools Irrigation Fire Lines Industrial In determining the classes of service for cost of service purposes, the objective is to group customers together into similar or homogeneous groups based on facility requirement and/or flow characteristics. 4.4 General Cost of Service Procedures In order to determine the cost to serve each customer class of service, a cost of service analysis is conducted. A cost of service study utilizes a three-step approach to review costs. These were previously discussed in our generic discussion in Section 2, and take the form of functionalization, classification, and allocation. Provided below is a detailed discussion of the water cost of service analysis conducted for the District, and the specific steps taken within the analysis Functionalization of Costs The first analytical step in the cost of service process is called functionalization. Functionalization is the arrangement of expenses and asset (plant) data by major operating functions (e.g. treatment, pumping, distribution). Within this study, the functionalization of the data was largely accomplished through the District s system of accounts. A cost of service study utilizes a three-step approach to review costs. These take the form of functionalization, classification, and Classification of Costs The second analytical task performed in a cost of service study is the classification of the costs. Classification determines why the expenses were incurred or what type of need is being met. The District s plant accounts and revenue requirement were reviewed and classified using the following cost classifiers: Commodity Related Costs: Commodity costs are those costs which tend to vary with the total quantity of water consumed by a customer. Commodity costs are those incurred under average load (demand) conditions and are generally specified for a period of time such as a month or year. Chemicals or utilities are examples of commodity-related cost as these costs tend to vary based upon the total flow of water. Capacity Related Costs: Capacity costs are those which vary with peak demand, or the maximum rates of flow to customers. System capacity is required when there are large demands for water placed upon the system (e.g., summer lawn watering). For water Development of the Cost of Service Analysis 29

34 utilities, capacity related costs are generally related to the sizing of facilities needed to meet a customer s maximum water demand at any point in time. For example, portions of distribution storage reservoirs and mains (pipes) must be adequately sized for this particular type of requirement. Customer Related Costs: Customer costs are those cost which vary with the number of customers on the water system. They do not vary with system output or consumption levels. These costs are also sometimes referred to as readiness to serve or availability costs. Customer costs may also sometimes be further classified as either actual or weighted. Actual customer costs vary proportionally, from customer to customer, with the addition or deletion of a customer regardless of the size of the customer. In contrast, a weighted customer cost reflects a disproportionate cost, from customer to customer, with the addition or deletion of a customer. An example of an actual customer cost is postage for mailing bills. This cost does not vary from customer to customer, regardless of the size or consumption characteristics of the customer. Examples of weighted customer costs are items such as meter maintenance expenses, where a large industrial customer requires a significantly more expensive meter than a residential customer. Public Fire Protection Related Costs: Public fire protection costs are those costs related to the public fire protection functions. Usually, such costs are those related to public fire hydrants and the over-sizing of mains and distribution storage reservoirs for fire protection purposes. Revenue Related Costs: Certain costs associated with the utility may vary with the amount of revenue received. An example is a utility tax based upon the amount of rate revenues received by the water utility. Direct Assignments: Certain costs associated with operating the system may be directly traced to a specific customer or class of service (e.g., bad debt expenses). In this case, these costs are then directly assigned to that specific class of service. This assures that other classes of service will not be allocated any costs for those significant facilities from which they do not benefit. Water Cost of Service Analysis Terminology Functionalization The arrangement of the cost data by functional category (e.g. source of supply, treatment, etc.). Classification The assignment of functionalized costs to cost components (e.g. commodity, capacity, customer and fire protection related). Allocation Allocating the classified costs to each class of service based upon each class s proportional contribution to that specific cost component. Commodity Costs Costs that are classified as commodity related vary with the total flow of water (e.g., chemical use at a treatment plant). Capacity Costs Costs classified as capacity related vary with peak day or peak hour usage. Facilities are often designed and sized around meeting peak demands. Fire Protection Costs Costs that are related to fire protection services (e.g. hydrants). Customer Costs Costs classified as customer related vary with the number of customers on the system, e.g. metering costs. Direct Assignment Costs that can be clearly identified as belonging to a specific customer group or group of customers Allocation of Costs Once the classification process is complete, and the customer groups have been defined, the various classified costs were allocated to each customer class of service. The classified costs Development of the Cost of Service Analysis 3

35 were allocated to the District s various customer classes of service using the following allocation factors. Commodity Allocation Factor: As noted earlier, commodity-related costs vary with the total flow of water. Therefore, the commodity allocation factor was based on the projected total metered consumption plus losses for each class of service for the projected test period. Capacity Allocation Factor: The capacity allocation factor was developed based on the assumed contribution to peak day use of each class. Peak day use by customer group was estimated using assumed peaking factors for each customer group. In this particular case, the peaking factor was defined as the relationship between peak day contribution and average day use and determined for each customer group based on a review of the average month to peak month usage. Given an estimated peaking factor, the peak day contribution for each class of service was developed. Customer Allocation Factor: Customer costs vary with the number of customers on the system. Two basic types of customer allocation factors were identified actual and weighted. The allocation factors for actual customers were based on the projection of the number of customers developed within the revenue requirement. The weighted customer allocation factors is also broken down further into two factors which attempt to reflect the disproportionate costs associated with serving different types of customers. The first weighted customer factor is for customer service and accounting. This weighted customer allocation factor takes into account the fact that it may take more time to read a meter and process a bill for various customers. The second weighted customer allocation factor is for meters and services. This factor attempts to reflect the different costs associated with providing larger sized meters. For example, there is a significant cost difference associated with replacing a 3/4 meter compared to a six-inch meter. This cost difference is reflected within the allocation factor. Public Fire Protection Allocation Factor: The development of the allocation factor for public fire protection expenses involved an analysis of each class of service and their fire flow requirements. The analysis took into account the gallon per minute fire flow requirements in the event of a fire, along with the duration of the required flow. The fire flow rates used within the allocation factor were based on industry standards and similar experiences with other water cost of service studies. The minimum fire flow requirements are then multiplied by the number of customers in each class of service, and the assumed duration of the fire, to determine the class prorated fire flow requirements. Revenue Related Allocation Factor: The revenue related allocation factor was developed from the projected rate revenues for 213 for each customer class of service. These same revenues were used within the revenue requirement analysis previously discussed in Section 3. Given the development of the allocation factors, the final step in the cost of service study is to allocate the classified costs to the various customer classes of service. 4.5 Functionalization and Classification of Water Plant in Service Once the methodology of developing the cost of service analysis is established, the first step is to functionalize and classify the water assets/infrastructure, or plant in service. In performing the functionalization of plant in service, HDR utilized the District s historical accounting records. Once the assets were functionalized, the analysis shifted to classification of the asset. The classification process included reviewing each group of assets and determining which cost classifiers the assets were related to. For the District s cost of service analysis the assets were Development of the Cost of Service Analysis 31

36 classified as: capacity-related, commodity-related, customer-related, revenue-related, public fire protection-related or direct assignment. Provided below is a brief discussion of the classification process used. Source and pumping assets were classified between commodity and capacity related costs. The percentage split between commodity and capacity was based on the ratio of average day use to peak day use. Consumption over and above average day use is considered capacity related. Source and pumping facilities were classified as 55% commodity related and 45% capacity related. This classification reflects the District s usage characteristics as they related to peak summer demand (capacity needs) in relation to their average day use (base or commodity needs). Transmission and distribution mains are typically assumed to meet three different types of needs on a water system. First, a distribution system must be in place to meet a customer s minimum requirements for water. This portion of the distribution main plant investment is considered customer related, or a function of the number of customers on the system. Next, a portion of the distribution system mains is considered a function of peak flow requirements on the system. Distribution mains must be sized to adequately meet the peak flows demanded by customers. This portion of the distribution main plant investment is considered capacity related. Finally, distribution mains must also be sized for fire flow demands. This final portion of over-sizing for distribution plant investment is classified as public fire protection related. The analysis of the distribution mains classified them as being 15% customer-related, 74% capacity-related, and 11% public fire protection-related. Water distribution tanks (distribution storage reservoirs) are typically designated to meet at least two types of needs on a water system. These two types of needs are capacity related and fire protection related. Capacity is required to meet instantaneous peak day and peak hour flow requirements. At the same time, distribution reservoirs must also have sufficient capacity to meet fire flow requirements. The total storage capacity of the District s reservoirs was examined and consideration given to the capacity required for fire protection purposes under a worst case scenario. This amount of capacity, in relation to the total storage capacity, is considered fire protection related. The balance of storage capacity is considered capacity related. For the District s study 94% of the costs were attributed to capacity related costs and the remaining 6% were related to public fire protection. Table 4-1 shows a summary of the basic functionalization and classification of the major water assets. A more detailed exhibit of the functionalization and classification of the assets can be found in the Technical Appendix, Exhibit 9. Development of the Cost of Service Analysis 32

37 Table 4 1 Summary of the Classification of Water Plant in Service Plant Description Capacity Commodity Customer Fire Related Related Related Protection Source 45% 55% % % Transmission and Distribution Mains 74% % 15% 11% Meters/Meter Boxes % % 1% % Hydrants % % % 1% Storage/Reservoir 94% % % 6% Pumping 45% 55% % % 4.6 Functionalization and Classification of Operating Expenses Operating expenses are generally functionalized and classified in a manner similar to the corresponding asset. For example, maintenance of distribution mains is typically classified in the same manner (classification percentages) as the distribution main assets. This approach to classification of operating expenses was used for this analysis. For the District s study, the revenue requirement for 214 was functionalized, classified, and allocated. As noted earlier, the District utilized a cash basis revenue requirement, which was comprised of operation and maintenance expenses, taxes, debt service, and capital additions funded from rates. A more detailed review of the classification of revenue requirement can be found in the Technical Appendix, Exhibit Major Assumptions of the Cost of Service Analysis A number of key assumptions were used within the District s cost of service analysis. Below is a brief discussion of the major assumptions used. The test period used for the cost of service analysis was 214. The 214 time period was used to look forward for the rate setting process. The revenue and expense data was previously developed within the revenue requirement study and provided by District staff. A cash basis approach was utilized which conforms to generally accepted water cost of service approaches and methodologies. The classification of plant in service was developed based on generally accepted cost allocation techniques. Furthermore, they were developed using District specific data. Customer usage figures used within this study were provided for each class of service from historical usage information provided by District staff. Capacity allocation factors were estimated based on the relationship of each customer class s average month to peak month usage characteristic, along with certain estimates of the relationship between classes of service. Development of the Cost of Service Analysis 33

38 4.8 Summary of the Cost of Service Results In summary form, the cost of service analysis began by functionalizing the District s plant asset records and then the operating expenses. The functionalized plant and expense accounts were then classified into their various cost components. The individual classification totals were then allocated to the various customer groups based upon the appropriate allocation factors. The allocated expenses for each customer group were then aggregated to determine each customer group s overall revenue responsibility for 214. While the cost of service allocated costs between the customer classes noted in section 4.3, the final cost allocation was based on the current rate schedules. A summary of the detailed cost responsibility developed by rate schedule is shown in Table 4-2 for the 214 test period. Table 4 2 Summary of the Cost of Service Analysis 214 Test Period ($s) Class of Service Present Rate $ % Allocated Costs Revenues Difference Difference Single Family $3,847,972 $4,19,287 $261, % Commercial 1,584,349 1,546,237 (38,112) -2.4% Irrigation 963,91 1,53,47 89, % Private Fire Protection 78,786 8,89 2,14 2.7% Total $6,474,199 $6,789,462 $315, % The allocation of costs attempted to assure the facilities and costs allocated to each customer class reflected their respective benefit. The cost of service results indicated that minor costs differences exist between the customer classes of service. A general rule of thumb that can be used as a guide when reviewing a cost of service analysis is if a class is within +/- 5% of the overall required adjustment the class is likely paying its fair share. This is done as a cost of service based on one year s data and customer information, and Test Year 214 Allocated Costs $4,19,287 use may change over time. It is Single - Family appropriate to determine Commercial whether these findings are Irrigation consistent over time, and adjust Fire Line rates accordingly as consistent 8,89 results are developed. 1,53,47 1,546,237 The customer class that is outside of the typical rule of thumb is the commercial class of service. The commercial results show a lower than average overall rate adjustment. This appears to be the result of lower peak demands as a class. This may be the results of separate irrigation (outdoor watering) accounts for commercial customers. While the cost of service analysis results indicate minor cost of service differences between the customer classes of service, it does not appear to be an immediate or pressing problem. Given that a rate adjustment is necessary, and increasing the revenue stability of the current rates is Development of the Cost of Service Analysis 34

39 a key goal, HDR would not recommend any cost of service adjustments at this time which would result in additional rate impacts to customers. In addition, this is the first cost of service analysis completed for the District since 23 and reflects the current generally accepted cost allocation methodologies. This cost of service analysis provides the results for one point in time. These results will provide a baseline for the District to begin reviewing future cost of service results and make future adjustments based on those results. As this study is updated over time, the District will have a far better understanding of the usage and cost relationships between the various customer classes of service. The District bills a single rate for all fire protection service regardless of the size of the service. Staff will gather information prior to the next rate study for the purpose of evaluating the cost of service based on the size of the customer. 4.9 Conclusions and Recommendations As shown in Table 4-2, minor differences in cost appear to exist between the various classes of service, and as noted, it is not recommended that the cost of service results be implemented at this time. In addition, during the rate design analysis the rate structure has been revised for the single-family customers and the basic charge adjusted to enhance the revenue stability of the rates. Given a change in rate level, and again in rate structure, may result in significant impacts to customer bills. Over time, as the District updates the cost of service analysis, and similar results occur, the District will be able to implement cost of service adjustments based on additional information. Given the above discussion, it is recommended that each customer class of service be adjusted by the overall rate adjustment. As a result of the proposed rate structure, customer will potentially move closer to the cost of service results. 4.1 Summary This section of the report has provided the results of the cost of service analysis developed for the District. This analysis was prepared using generally accepted cost of service techniques. The next section of the report will discuss the development of the water rate designs for the various customer classes of service. Development of the Cost of Service Analysis 35

40 Section 5 Development of the Rate Design Analysis 5.1 Introduction The final step of the comprehensive water rate study process is the design of water rates to collect the desired levels of revenues, based on the results of the revenue requirement and cost of service analyses. In reviewing water rate designs, consideration is given to the level of the rates and the structure of the rates. 5.2 Rate Design Criteria and Considerations Prudent rate administration dictates that several criteria must be considered when setting utility rates. Some of these rate design criteria are listed below: Rates which are easy to understand from the customer s perspective Rates which are easy for the utility to administer Consideration of the customer s ability to pay Continuity, over time, of the rate making philosophy Policy considerations (encourage conservation, economic development, etc.) Provide revenue stability from month to month and year to year Promote efficient allocation of the resource Equitable and non-discriminatory (cost-based) Many contemporary rate economists and regulatory agencies feel the last consideration, costbased rates, should be of paramount importance and provide the primary guidance to utilities on rate structure and policy. It is important that the District provide its customers with a proper price signal as to what their consumption or usage is costing. This goal may be approached through rate level and structure. When developing the proposed rate designs, all the above listed criteria were taken into consideration. However, it should be noted that it is difficult, if not impossible, to design a rate that meets all the goals and objectives listed above. For example, it may be difficult to design a rate that takes into consideration the customer s ability to pay, and one which is costbased. In designing rates, there are always trade-offs between the goals and objectives. As a part of this study, the District was interested in developing cost-based rates by customer class of service as well as increasing the revenue stability of the current rates. 5.3 Current Industry Thinking and Trends Given the recent decline in consumption utilities across the Country are experiencing, many utilities are revising their rate structures to maintain revenue stability. This can be accomplished in several ways, however the most common method is to increase the level of the fixed charge, or in combination with the fixed charge increase modify the consumption charges to provide additional revenue stability. In addition to meeting rate design goals and objectives the District, as a signatory to the CUWCC BMPs, the District also needs to maintain a conservation price signal through its rate designs. This is accomplished by maintaining no Development of the Rate Design Analysis 36

41 more than 3% of the revenue collected from rates through the fixed charge. This was also reviewed and maintained for the proposed rate designs. 5.4 Overview of the Rate Design Process When developing rates, there are two components to take into consideration, the level of the rates, and the structure of the rates. The level of the rates is the annual amount of revenue to be collected to prudently fund the utility. The structure of the rates is how the revenue is collected from the customers. For the District s study the level of the rates has been adjusted for all customers, while the structure of the rate has only been adjusted for the single-family customers. All other customers rate structure has remained the same. As noted previously, a key objective in the development of the proposed rate designs was increasing the revenue stability of the rate structure given the recent declines and variations from year to year in consumption levels. This was primarily accomplished by establishing a fixed charge for all customers that would provide a level of base revenues the District would receive regardless of water consumption. Several rate design alternatives were developed and reviewed with District staff and management assuming various levels of the fixed charge and resulting consumption charges. The target level of revenues collected through the fixed charge for the proposed rates was 25% of total revenues. This allows the District s rate design to be in compliance with the CUWCC BMPs. 5.5 Review of the Overall Rate Adjustments As indicated in the revenue requirement analysis, the overall level of rates needed to be adjusted by approximately $2.4 million. In addition, minor cost of service differences were determined during the cost of service analysis. Given that the priority for the District was to adjust and transition the overall level of the water rates to meet s financial needs, and meet the revenue stability goal, the results of the revenue requirement analysis were the primary basis for establishing the proposed rates. Again, the only exception to this is for the singlefamily customers where the proposed rate structure was revised. The primary change in the proposed rate designs was made in the basic charge. Given the increase in the basic charge, the consumption charges were adjusted to collect the appropriate level of revenues. 5.6 Present and Proposed Rate Structures The District s present rates include both a fixed charge component and a consumption charge component. The fixed charge applies to all customers, based on the customers specific meter size, and is charged on a bi-monthly basis. The consumption charges vary by customer class and include an increasing block rate structure, a seasonal rate structure, and a uniform rate structure. Provided in the following discussion is more detail for each customer class of service Rate Transition Plan The results of the revenue requirement analysis indicated the need to increase rates for the FYE 214 rate period. While no cost of service adjustments are proposed at this time, the proposed rates were developed with the potential to move customers to a more cost-based level. A key element of this study was the enhancement of the revenue stability of the current rate structure given the variability of supply (different water shortage stages in differing years) and the decline in overall water consumption over the last several years. Over the past several Development of the Rate Design Analysis 37

42 years consumption has leveled off and additional declines in consumption may not occur. Given that, the proposed rates are based on this new level of consumption. Based on the analysis, and District s rate design goals and objectives, the proposed rates for FYE 214 were developed. It should be noted that the District s rates are currently set at drought stage 1. In addition, the District s customers are also charged the Temporary Infrastructure Charge (TIC). For purposes of setting rates for FYE 214, the District has proposed that rates be set at the normal level (no drought surcharge) given the availability of water in the near-term. In addition, the TIC charge will not be included as part of the proposed rate structure. To meet the goal of enhancing revenue stability, the proposed rate structure has increased the bi-monthly basic charge to reflect the fixed costs the District incurs regardless of water consumption. By increasing the basic charge, and decreasing the consumption charge, the bill impacts to the average customer is minimized when compared to the current bill (which includes drought stage 1 rates and TIC charges) Single-Family Water Rate Design The proposed residential rate structure has been revised based on policy direction from the District Board and discussions with the District s Finance Committee and staff. The present rate structure is a three block increasing rate structure. While the general rate structure was maintained, the proposed rate structure decreased the size of the first block. The end of the second block remains the same as does the third block. As mentioned, the service charge for the proposed rate structure has been increased to increase the revenue stability of the rate structure. The revisions to the block sizes were to provide a lower cost first block for essential needs and low water users as the service charges are increasing. Provided below in Table 5-1 is a summary of the present and proposed single-family rates. Table 5-1 Summary of the Present and Proposed Single-Family Water Rate Design Present Single-Family Rate [1,2] Proposed Single-Family Rate [2] Bi-Monthly Service Charge [3] 5/8 $ / / Consumption Charges - $/CCF [4] 2 CCF $ CCF $1.26 Over 34 CCF $1.49 Bi-Monthly Service Charge 5/8 $ / / Consumption Charges - $/ CCF 1 CCF $ CCF $1.5 Over 34 CCF $1.4 [1] Adopted 213 Rates. [2] Rate summary does not include the Zone 7 consumption charges, or the energy charge when applicable, which are included on the customer bill [3] Current Bi-Monthly Charge includes the Temporary Infrastructure Charge (TIC) [4] Present consumption charges reflect the current consumption charges for Water Shortage Stage 1 which is the stage the District has been in since July 29 and which approximates projected consumption levels under normal conditions (non- water shortage) in the future Development of the Rate Design Analysis 38

43 Both components of the rate structure have been modified under this proposed rate. First, the service (meter) charges have been modified to provide additional revenue stability. Second, the sizing of the first block has been adjusted to reflect indoor, or winter, water consumption. As noted, Table 5-2 does not include the Zone 7 consumption charge, which is currently set at $2.27 per CCF, as the Zone 7 charge is designed to be a pass-through cost from the District. The proposed rate design is cost-based in that it is designed to collect the specific revenue requirement of the residential class of service. The bill comparison developed for this class of service, including the Zone 7 charges, shows the impacts of the proposed rate structure. However, given the overall increase in revenue needs, the bill impact varies based on consumption. This rate structure provides Present and Proposed Bi-Monthly Single-Family Bill Comparison with 5/8" meter - Consumption in CCF $2. $15. $1. $5. $. ($5.) Present Bill $41.92 $57.72 $73.52 $89.32 $16.97 $ $161.3 Proposed Bill $45.6 $59.45 $76.5 $92.65 $19.25 $ $ additional revenues Bill Difference $3.68 $1.73 $2.53 $3.33 $2.28 $1.23 ($.15) stability, but still maintains the conservation incentive. As a point of reference, the first block (up to 1 ccf) captures approximately 1% of the typical residential consumption, the second block captures 7% of the typical consumption, and the final 2% in the third consumption block Commercial Water Rate Design The present rate for the commercial customers, which includes all commercial customers, schools, and master-metered multi-residential includes the same fixed service charge as residential customers and a seasonal consumption charge. Presented in Table 5-2 are the present and proposed commercial rates. Development of the Rate Design Analysis 39

44 Table 5-3 Summary of the Present and Proposed Commercial Water Rate Design Present Commercial Rate [1,2] Proposed Commercial [2] Bi-Monthly Service Charge [3] 5/8 $ / / , , , , Consumption Charges - $/CCF [4] Winter (Nov. April) $1.4 Summer (May Oct.) $1.45 Bi-Monthly Service Charge 5/8 $ / / , , , , Consumption Charges - $/CCF Winter (Nov. April) $1. Summer (May Oct.) $1.2 [1] Adopted 213 Rates. [2] Rate summary does not include the Zone 7 consumption charges, or the energy charge when applicable, which are included on the customer bill [3] Current Bi-Monthly Charge includes the Temporary Infrastructure Charge (TIC) [4] Present consumption charges reflect the current consumption charges for Drought Stage 1 Similar to the residential rate Present and Proposed Bi-Monthly Comercial Bill Comparison structure, the bimonthly with 1" meter - Consumption in CCF service $9. charge was $8. increased to $7. $6. meet the revenue $5. stability goal for $4. $3. the rate design $2. $1. process. Given $. the increase in Present Winter Bill $98.4 $148.5 $23.8 $ $396.3 $561.8 $727.3 the fixed charge, Proposed Winter Bill $112.1 $ $242.9 $ $46.4 $569.9 $733.4 the consumption Present Summer Bill $12.5 $158.3 $251.3 $344.3 $437.3 $623.3 $89.3 charges were Proposed Summer Bill $114.1 $ $252.9 $ $426.4 $599.9 $773.4 adjusted to collect the target revenues from the commercial class of service. Similar to the residential charges, the Zone 7 wholesale water is a pass-through rate and included on the customers bill Potable Irrigation Water Rate Design The potable irrigation rate is based on the third block of the single-family rate structure. The rate includes both the fixed service charge and the consumption charge. Provided in Table 5-3 is a summary of the present and proposed potable irrigation rate. Development of the Rate Design Analysis 4

45 Table 5-3 Summary of the Present and Proposed Potable Irrigation Water Rate Design Present Potable Irrigation Rate [1,2] Proposed Potable Irrigation Rate [2] Bi-Monthly Service Charge [3] 5/8 $ / / , , , , Consumption Charges - $/CCF [4] All Consumption $1.53 Bi-Monthly Service Charge 5/8 $ / / , , , , Consumption Charges - $/CCF All Consumption $1.4 [1] Adopted 213 Rates. [2] Rate summary does not include the Zone 7 consumption charges, or energy charge when applicable, which are included on the customer bill [3] Current Bi-Monthly Charge includes the Temporary Infrastructure Charge (TIC) [4] Present consumption charges reflect the current consumption charges for Drought Stage 1 Similar to the single-family and commercial rate structures, the potable irrigation rate structure reflects the increased fixed service charge. The Present and Proposed Potable Irrigation Bill consumption charges have Comparison with 1" meter - Consumption in CCF been adjusted to reflect $9. the revenues that should $8. be collected from the $7. $6. potable irrigation class of $5. service. As with the $4. $3. previous rate structures, $2. the proposed rates are in $1. $. addition to the Zone Present Bill $13.3 $16.3 $255.3 $35.3 $445.3 $635.3 $825.3 charges which are directly Proposed Bill $116.1 $ $262.9 $ $446.4 $629.9 $813.4 billed to the customers on their bill Recycled Water Rate Design Recycled water may be used in a variety of non-potable uses, but it typically is used for irrigation purposes. As such, the pricing of recycled water should reflect the lower quality of the water being used. Historically, the District has utilized a formula driven approach to establish recycled water rates. In the District s case, the formula used to establish the recycled water rate was defined as follows: Development of the Rate Design Analysis 41