WATER AND SEWER RATE STUDY

Transcription

1 FINAL WATER AND SEWER RATE STUDY B&V PROJECT NO PREPARED FOR City of Lynwood, CA JANUARY 11, 2017 Black & Veatch Holding Company All rights reserved.

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3 City of Lynwood, CA WATER AND SEWER RATE STUDY Table of Contents 1 Introduction Background Scope of Work Disclaimer Water Rate Study Revenue and Revenue Requirements Customer and Water Usage Projections Revenue Under Existing Rates Other Revenue Operating and Maintenance Expenses Debt Service Requirements Capital Improvement Program Projected Operating Results Debt Service Requirements Test Year Revenue Requirements Cost of Service Allocation Functional Cost Components Allocation to Cost Components Allocation of Operating and Maintenance Expense Allocation of Capital Investments Units of Service Cost of Service Allocations Units Costs of Service Distribution of Costs of Service to Customer Classes Adequacy of Existing Rates to Meet Costs of Service Proposed Rate Adjustments Existing Rates Proposed Rates Readiness-to-Serve Charge Fire Service Revenue Recovery Under Proposed Rates Neighboring Water Utilities Sewer Rate Study Revenue and Revenue Requirements Customer Account Projections Revenue Under Existing Rates BLACK & VEATCH CORPORATION Table of Contents i

4 Water and Sewer Rate Study City of Lynwood, CA 5.4 Other Revenue Operating and Maintenance Expenses Debt Service Requirements Capital Improvement Program Projected Operating Results Test Year Revenue Requirements Cost of Service Allocation Functional Cost Components Allocation to Cost Components Allocation of Operating and Maintenance Expense Allocation of Capital Investments Units of Service Cost of Service Allocations Units Costs of Service Distribution of Costs of Service to Customer Classes Adequacy of Existing Rates to Meet Costs of Service Proposed Rate Adjustments Existing Rates Proposed Rates Revenue Recovery Under Proposed Rates Neighboring Utilities ii B&V PROJECT NO JANUARY 25, 2017

5 City of Lynwood, CA WATER AND SEWER RATE STUDY 1 Introduction This report was prepared for the City of Lynwood (City) to document the development of a multi-year financial plan, cost of service analysis and rate design for the City s water and sewer utilities. The specific objectives of the study were to: Review and evaluate existing policies and procedures affecting water and sewer rates; Develop an individual financial plans for water and sewer covering a five-year study period between Fiscal Year (FY) 2017 and FY 2021 for ongoing operations and planned capital improvements; Allocate the water and sewer projected FY 2017 revenue requirements to the various customer class in accordance with the respective service requirements; Develop a suitable 5-year rate schedule that produces revenues adequate to meet financial needs while recognizing customer costs of service and state policy considerations such as Proposition 218, the San Juan Capistrano Ruling and the Governor s Executive Order B for water conservation. 1.1 BACKGROUND Located in Los Angeles County, the City of Lynwood provides water and sewer services to an average of 9,150 residential, commercial, municipal, and fire connections. The City provides drinking water to its residents from local groundwater and import water. Groundwater is pumped from the Central Groundwater Basin through five active wells located throughout the City. Import water serves as a supplemental source and is purchased from Metropolitan Water District (MWD) via Central Basin Municipal Water District (CBMWD). Together these two sources meet the City s annual 5,600 acre-feet (AF) demand. The City distributes groundwater and import water through its 3.0 million gallon reservoir and 90 miles of distribution pipelines. In addition, the City provides sewer services by collecting and transporting sewage flow over its 81 miles of collection pipelines to the Sanitation District of Los Angeles County (LACSD). LACSD provides treatment and disposal services for the City s residents. In general, the City operates and maintains the water and sewer utilities as self-supporting enterprises. As such, consistent with the best management practices of most municipal utilities, water and sewer rates are developed to provide sufficient levels of revenue to meet all operation and maintenance expenses, debt service requirements, routine annual replacements of capital improvements to be funded from current revenues, and other revenue requirements. 1.2 SCOPE OF WORK The purpose of this study was to develop individual water and sewer financial plans that project operating revenue, expenses and capital financing costs for water and sewer operations over a five-year planning period beginning July 1, 2016 and ending June 30, As part of the plan, future revenues under existing rates, operation and maintenance (O&M) expense, principal and interest expense on bonded debt, establishment and/or maintenance of reserve funds, and capital improvement requirements are considered. Annual projections of customers, water use, revenues, and expenditures have been made using historical data and estimates based on SBx7-7 and Executive Order requirements for the next five years. BLACK & VEATCH CORPORATION Introduction 1

6 Water and Sewer Rate Study City of Lynwood, CA Using the financial plans, a cost of service analysis and rate design was performed for water and sewer. The water and sewer s costs of service were allocated to customer classes utilizing a cost causative approach endorsed by the American Water Works Association (AWWA) M1 manual and Water Environment Federation (WEF) Manual of Practice (MoP) No. 27. These allocation methodologies produce cost of service allocations recognizing the projected customer service requirements for the City. Proposed rates are designed in accordance with allocated cost of service and local policy considerations. The extent to which the existing rate structure recovers revenues from customer classes in accordance with cost of service allocations is also evaluated. 1.3 DISCLAIMER In conducting our study, we reviewed the books, records, agreements, capital improvement programs, and customer sales and financial projections of the Water and Sewer Enterprise Fund as we deemed necessary to express our opinion of the operating results and projections. While we consider such books, records, documents, and projections to be reliable, Black & Veatch has not verified the accuracy of these documents. The projections set forth in this report below are intended as forward-looking statements. In formulating these projections, Black & Veatch has made certain assumptions with respect to conditions, events, and circumstances that may occur in the future. The methodology utilized in performing the analyses follows generally accepted practices for such projections. Such assumptions and methodologies are reasonable and appropriate for the purpose for which they are used. While we believe the assumptions are reasonable and the projection methodology valid, actual results may differ materially from those projected, as influenced by the conditions, events, and circumstances that actually occur. Such factors may include the water and sewer utilities ability to execute the capital improvement program as scheduled and within budget, regional climate and weather conditions affecting the demand for water and production of sewer and adverse legislative, regulatory or legal decisions (including environmental laws and regulations) affecting the water and sewer utilities ability to manage the system and meet water quality requirements. 2 B&V PROJECT NO JANUARY 25, 2017

7 City of Lynwood, CA WATER AND SEWER RATE STUDY 2 Water Rate Study 2.1 REVENUE AND REVENUE REQUIREMENTS The water utility provides drinking water to its residential, commercial and industrial water customers. To cover the costs associated with providing water services to its customers, the water utility derives revenue from a variety of sources including readiness to serve charge, water sales charge, reconnection charges, tap fees, and interest earned from the investment of available funds. The level of future revenue generated in the study is projected through a combination of an analysis of historical and future system growth in terms of number of connections and consumption. With revenue derived from the various sources, the water utility meets the cash requirements of operation and maintenance; water supply costs; debt service and reserve payments on bond indebtedness; and recurring annual capital expenditures for replacements, system betterments, and extensions not debt financed. O&M expenses are those expenditures necessary to maintain the system in good working order. Water supply costs are those associated with pumping groundwater via the Water Replenishment District and purchasing import water from the Central Basin Municipal Water District. Routine annual capital expenditures, which include equipment replacements, consist of recurring annual replacements, minor extensions, and betterments which are normally revenue financed. Other capital costs include principal and interest payments, bond covenant-required payments, and the costs of major capital improvements are paid directly from annual operating revenues. 2.2 CUSTOMER AND WATER USAGE PROJECTIONS The water utility has three major customer classes. These customer classes are: 1) Residential, which consists of all single family accounts and multi-family accounts with less than four dwelling units; 2) Commercial, which consists of multi-family accounts with four or more dwelling units and all other non-residential classes 1 ; and 3) Fire, which consists of private fire lines that serve customers with specific fire protection needs. 2 Based on a detailed review of historical growth patterns and planning estimates in the City s 2010 Urban Water Management Plan, the number of customer connections is projected to increase by an average of 0.25 percent for the study period. The City is fairly built-out with most of the growth coming from high density expansion and commercial growth. Shown in Table 2-1 are the projected customer accounts. 1 These non-residential classes are commercial, industrial, hospitals, schools and municipal customers. 2 Fire customers may be residential or commercial. BLACK & VEATCH CORPORATION Water Rate Study 3

8 Water and Sewer Rate Study City of Lynwood, CA Table 2-1 Number of Water Customer Connections No. Projected water sales consumption for the study period is shown in Table 2-2. In determining the projected water sales consumption, historical patterns of water usage were analyzed in conjunction with the mandatory reduction issued by the Governor of California through Executive Orders. The Executive Orders affect each water utility throughout the State differently. Based on historical consumption within the City, the City was assigned a 16 percent water consumption reduction compared to the same time in Calendar Year (CY) 2013 for FY Given that the City s residents have understood and implemented cutback measures, it anticipated that consumption will rebound slowly in the study period. It is expected that FY 2017 consumption will increase by 4.75%, in FY 2018 by 2.25% and FY 2019 to FY 2021 by 0.25% per year. Table 2-2 Billed Water Consumption 2.3 REVENUE UNDER EXISTING RATES Fiscal Year Ending June 30, FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 (connections) (connections) (connections) (connections) (connections) Customer Class 1 Residential 7,764 7,783 7,802 7,821 7,841 2 Commercial 1,339 1,343 1,347 1,351 1,355 3 Fire Service Total 9,181 9,204 9,227 9,250 9,274 No. Description Description Fiscal Year Ending June 30, FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 (HCF) (HCF) (HCF) (HCF) (HCF) Customer Class 1 Residential 1,131,905 1,157,630 1,160,524 1,163,425 1,166,334 2 Commercial 909, , , , ,974 3 Total (HCF) 2,041,220 2,087,611 2,092,830 2,098,062 2,103,308 4 Total (AF) 4,686 4,792 4,804 4,816 4,829 The primary source of revenue for the water utility is derived from readiness to serve and water sales. The level of future revenue is projected based on an analysis of historical and projected system growth in terms of number of accounts and water consumption conducted in section 2.2. Using the accounts and water consumption, the applicable rates shown in Table 2-3 are applied to determine the total readiness to serve and water sales revenue. 4 B&V PROJECT NO JANUARY 25, 2017

9 City of Lynwood, CA WATER AND SEWER RATE STUDY Table 2-3 Existing Water Rates Meter Size Ready To Serve Charge Fire Fees ($/monthly) ($/monthly) 3/4" NA 1" " " " " " " " NA Commodity Charge ($/HCF) All Customers 2.92 NA Table 2-4 represents a summary of projected readiness to serve and water sales revenue under existing rates. As shown, the revenue generated is anticipated to slowly increase over the study period in conjunction with the increase in number of accounts and water consumption. The projected water revenue increases from $8,053,400 in FY 2017 to $8,256,000 in FY Table 2-4 Revenue under Existing Water Rates No. Description 2.4 OTHER REVENUE FY 2016 In addition to revenue from rates, the water utility obtains revenue from other operating sources. Other revenue sources include; reconnection charges, tap fees, interest earned from the investment of available funds and miscellaneous revenues. In total, these revenues represent less than 1 percent of total water revenues. It is anticipated that these revenues will remain relatively constant for the duration of the study period. 2.5 OPERATING AND MAINTENANCE EXPENSES Fiscal Year Ending June 30, FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 ($) ($) ($) ($) ($) Customer Class 1 Residential 4,756,300 4,834,900 4,846,800 4,858,900 4,871,100 2 Commercial 3,273,100 3,335,100 3,343,700 3,352,300 3,360,900 3 Fire Service 24,000 24,000 24,000 24,000 24,000 4 Total $ 8,053,400 $ 8,194,000 $ 8,214,500 $ 8,235,200 $ 8,256,000 Table 2-5 summarizes the water utility s projected operating and maintenance expense for the study period. Within the eight major line items, expenses are further separated by costs categories such as salaries and benefits, contracts and professional services, services and supplies, utilities, etc. These O&M categories are projected to increase between 1.0 and 10.0 percent per year depending on the type of category. Table 2-6 shows the escalation factors. BLACK & VEATCH CORPORATION Water Rate Study 5

10 Water and Sewer Rate Study City of Lynwood, CA Table 2-5 Water Operating and Maintenance Expenses No. Description Fiscal Year Ending June 30, FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 ($) ($) ($) ($) ($) O&M Expenses 1 City Manager 2 Administration 57,800 60,700 63,500 66,500 69,600 3 Finance & Administration 4 Water Billing/Collections 476, , , , ,000 5 Human Resources 6 General Services 43,716 45,800 47,800 49,900 52,200 7 Employee Personnel Service 43,716 45,800 47,800 49,900 52,200 8 Public Works 9 Water Utility 4,716,900 4,946,900 5,285,100 5,434,900 5,590, Sewer Service Technology & Media Support Services 12 Marketing Division Information Technology 233, , , , , Total $ 5,571,932 $ 5,835,200 $ 6,207,400 $ 6,393,000 $ 6,586,400 6 B&V PROJECT NO JANUARY 25, 2017

11 City of Lynwood, CA WATER AND SEWER RATE STUDY Table 2-6 Water O&M Expenses Escalators No. O&M Expense Category Escalation Factor 1 Salaries and Wages 3.0% 2 Fringe Benefits 7.0% 3 OPEB 10.0% 4 Materials & Supplies 1.0% 5 Contract Services 1.0% 6 Utilities 3.0% 7 Equipment 1.0% 8 Administrative 2.0% The largest O&M expenditure that the water utility incurs is associated with water supply costs. The City pays a replenishment assessment to the Water Replenishment District for groundwater it pumps. In addition, the City purchases imported water from MWD via CBMWD when the local groundwater supply is not sufficient to meet the City s water demands. In order to minimize its costs, the City tries to obtain water leases from other agencies not using their full groundwater allocations. In the past, the City has been successful in obtaining leases such as the current lease with the City of Bell Gardens. The lease does come with a cost, but it is significantly less than purchasing imported water. Currently, the City is 99 percent groundwater reliant. The City uses import water when maintenance is performed on a well. With the uncertainty in local and imported water supply costs, the City anticipates that water costs will increase at a rate of 7 percent per year over the study period. The increase will mainly affect the variable fees from WRD and CBMWD. The fixed fee from CBMWD is relatively small and therefore remains relatively constant. 2.6 DEBT SERVICE REQUIREMENTS Table 2-7 represents the water utility s existing debt service obligations. This table shows the combined principal and interest requirements on the existing debt over the study period. It is common practice for utilities to utilize debt to finance large capital improvement projects. By financing the cost of the projects, the City is able to fund large projects immediately and spread the payment over a specified time frame, thereby helping to offset the impact on rate-payers. Table 2-7 Existing Water Debt Service No. Description Fiscal Year Ending June 30, FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 ($) ($) ($) ($) ($) Revenue Bonds A Revenue Bonds 638, , , , , A Revenue Bonds 361, , , , , A Revenue Bonds 410, , , , ,100 4 Total $ 1,409,900 $ 1,411,300 $ 1,401,500 $ 1,407,500 $ 1,407, CAPITAL IMPROVEMENT PROGRAM The City s Capital Improvement Program (CIP) for FY 2017 through FY 2021 is summarized in Table 2-8. The City developed this multi-year CIP covering its commitments identified in the BLACK & VEATCH CORPORATION Water Rate Study 7

12 Water and Sewer Rate Study City of Lynwood, CA 2005 Water Master Plan and the 2015 Needs Assessment. The 2015 Needs Assessment reexamined the projects listed in the Water Master Plan and reprioritized the schedule accordingly. Based on the Water Master Plan and Needs Assessment, it was determined that the City needs to address a total of $30.9 million in capital needs. While the City is cognizant of its needs, the City developed the capital program in Table 2-8 which reflects planned projects that can be designed and or constructed over the study period. The City is projecting a $22.9 million capital improvement program, which includes both capital and replacement projects. Major capital projects identified include water main rehabilitations, new water wells with treatment, and Advance Meter Infrastructure (AMI). AMI provides the water utility to communicate with the water meter in real time, which provides operational, customer service and financial benefits to both the utility and customer. Benefits includes but not limited to: increased meter reading accuracy, improved utility asset management, easier water theft detection, early detection of meter failures, billing accuracy improvements, faster service restoration, flexible billing cycles, and providing the customer the ability to examine usage on real time-based case. The City received an estimate cost of $4.5 million for implementation which would occur over 3 years in FY 2018 to FY Table 2-8 Water Capital Improvement Projects by Function No. Description 2.8 PROJECTED OPERATING RESULTS Fiscal Year Ending June 30, FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 ($) ($) ($) ($) ($) Capital Projects 1 Source of Supply 3,428, ,900 1,900,000 2,516,500 3,000,000 2 Transmission & Distribution 429,200 2,628,000 3,028,000 3,028,000 1,225,000 3 General Plant 642, , Total $ 4,500,000 $ 3,660,900 $ 4,928,000 $ 5,544,500 $ 4,225,000 The revenue requirements of the water utility consist of system O&M expense, water supply costs, debt service requirements, and transfers (capital contributions). In the analysis, it was important to identify the state of the water utility under no revenue increases, known as the status quo scenario. Under this scenario, the water utility will not impose any revenue increases over the study period. As shown in Figure 2-1, the status quo conditions means that the water utility will operate at an annual deficit position thus tapping into its operating reserves. In addition, since the water utility has debt service commitments, the City would need to reduced capital improvements or implement some type of rate increase. 8 B&V PROJECT NO JANUARY 25, 2017

13 City of Lynwood, CA WATER AND SEWER RATE STUDY Figure 2-1 Status Quo Projected Revenue and Revenue Requirements $20,000,000 $15,000,000 $10,000,000 $5,000,000 $0 -$5,000,000 -$10,000,000 -$15,000,000 -$20,000,000 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 O&M Expenses Water Supply Costs Debt Service Capital Projects Transfers Revenue Operating Reserves In order to avoid deficit positions, the water utility examined various options for revenue increases that would meet the revenue requirements. Based on the goals and objectives, the City arrived at the revenue adjustments shown in the operating cash flow on Table 2-9. The operating cash flow transitions the water utility to positive cash flow and meets its debt coverage requirement over the study period. The operating cash flow is separated into revenue and revenue requirements. In line 1 is the revenue under existing rates while lines 2 through 7 is the additional revenue generated from the required annual revenue increases. s 9 through 13 represent other revenues, which include reconnection charges, tap fees, interest earned from the investment of available funds and miscellaneous revenues. 14 represents the repayment of the inter-fund transfer from the sewer utility. In line 16, the total revenues generated from existing rates, revenue from increases and other operating revenue is summarized. The revenue requirements for O&M, water supply, debt service, and capital projects have been previously discussed. These revenue requirements are shown on lines 17 through 26 of Tables represents that total revenue requirement that will need to be met through revenue. The net cumulative balance is indicated in line 30. The City will transition from a minimum 16 percent of O&M expenses as an operating reserve balance to an industry standard of 90 days of O&M expenses (25 percent of O&M). The recommended revenue adjustments allow the water utility to reach a positive balance in FY 2022 while still incorporating capital improvement Debt Service Requirements Based on the operating cash flow, it is shown in line 32 that the City will not meet its debt service coverage requirement in FY 2017 and as noted by the City s Financial Advisor, will be in technical default. The City has directed Black & Veatch to proceed with not meeting the debt coverage requirements in FY 2017 as the City has informed Bond Counsel and its Financial Advisor that it intends immediate restoration of compliance with the described rate covenant through rate increases. BLACK & VEATCH CORPORATION Water Rate Study 9

14 Water and Sewer Rate Study City of Lynwood, CA With implementation of the proposed revenue adjustments and monitoring of O&M expenses, the City should be able to meet the coverage ratio of 1.25x in FY 2018 and forward. The exact debt service coverage ratio for each year is subject to verification by the City s Financial Advisor. Figure 2-2 presents the major components of the operating cash flow. Table 2-9 Water Operating Cash Flow No. Description Fiscal Year Ending June 30, FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 ($) ($) ($) ($) ($) Revenue Rate Revenue 1 Revenue from Existing Rates 8,053,400 8,194,000 8,214,500 8,235,200 8,256,000 Months Year Effective Rate Adj 2 FY % 201,300 1,229,100 1,232,200 1,235,300 1,238,400 3 FY % 706,700 1,417,000 1,420,600 1,424,200 4 FY % 814,800 1,633,700 1,637,800 5 FY % 939,400 1,883,500 6 FY % 1,083,000 7 Increased Revenue Due to Adjustments 201,300 1,935,800 3,464,000 5,229,000 7,266,900 8 Subtotal $ 8,254,700 $ 10,129,800 $ 11,678,500 $ 13,464,200 $ 15,522,900 Other Operating Revenue 9 Water Reconnection Charge 21,500 21,500 21,500 21,500 21, Tap & Meter Fee Charges Miscellaneous Revenue 1,800 1,800 1,800 1,800 1, Interest Income 60,800 63,100 56,600 31,900 39, Subtotal $ 84,200 $ 86,500 $ 80,000 $ 55,300 $ 63,000 Transfers 14 From Sewer Utility 19,500 19,500 19,500 19,500 19, Subtotal $ 19,500 $ 19,500 $ 19,500 $ 19,500 $ 19, Total Revenue $ 8,358,400 $ 10,235,800 $ 11,778,000 $ 13,539,000 $ 15,605,400 Revenue Requirements Operating & Maintenance 17 O&M Expenses 5,571,932 5,835,200 6,207,400 6,393,000 6,586, Water Supply 1,713,100 1,970,100 2,110,700 2,261,600 2,423, Subtotal $ 7,285,032 $ 7,805,300 $ 8,318,100 $ 8,654,600 $ 9,009,800 Debt Service 20 Existing Revenue Bonds 1,409,900 1,411,300 1,401,500 1,407,500 1,407, Proposed Revenue Bonds Subtotal $ 1,409,900 $ 1,411,300 $ 1,401,500 $ 1,407,500 $ 1,407,000 Transfers 23 To Capital Projects Fund 4,500,000 3,660,900 4,928,000 5,544,500 4,225, To Sewer Utility To Other Fund Subtotal $ 4,500,000 $ 3,660,900 $ 4,928,000 $ 5,544,500 $ 4,225, Total Revenue Requirements $ 13,194,932 $ 12,877,500 $ 14,647,600 $ 15,606,600 $ 14,641, Net Annual Cash Balance (4,836,532) (2,641,700) (2,869,600) (2,067,600) 963, Beginning Fund Balance 14,585,484 9,748,952 7,107,252 4,237,652 2,170, Net Cumulative Fund Balance $ 9,748,952 $ 7,107,252 $ 4,237,652 $ 2,170,052 $ 3,133, Working Capital Reserves - Target (90 days of O $ 1,796,300 $ 1,924,600 $ 2,051,000 $ 2,134,000 $ 2,221, Debt Service Coverage - Senior (1.25x) B&V PROJECT NO JANUARY 25, 2017

15 City of Lynwood, CA WATER AND SEWER RATE STUDY Figure 2-2 Operating Cash Flow Projected Revenue and Revenue Requirements $18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 O&M Expenses Water Supply Costs Debt Service Capital Projects Transfers Revenue Operating Reserves Test Year Revenue Requirements In analyzing the water utility s cost of service for allocation to its customer classes, the annual revenue requirements for FY 2017 is selected as the Test Year (TY) requirements to demonstrate the development of cost-of-service water rates. Based on achieving the water utility s principal goals within the study period, the cash flow in Tables 2-9 serves as the basis for the cost of service analyses. BLACK & VEATCH CORPORATION Water Rate Study 11

16 Water and Sewer Rate Study City of Lynwood, CA 3 Cost of Service Allocation The revenue requirements to be derived from rates for water utility are synonymous with the definition of the Cost of Service (COS). In developing equitable rate structures, revenue requirements are allocable to the various customer classifications according to the service rendered. Allocations of these requirements to customer classes should take into account the quantity of water consumed, peak flows, number of customers, and other relevant factors. The total costs of service to be recovered from water user rates for the TY 2017 are summarized in Tables 3-1. Table 3-1 Water Cost of Service No. Description Shown in line 5 is the total revenue requirement that corresponds with the Table 2-9 line 27. In order to derive the revenue requirement that will need to be recovered by the rates, it is necessary to deduct revenues from other sources as shown in lines 8 and represents the other operating revenues not associated with rates. 11 represents the net annual cash balance for the water utility during the Test Year. In this case, the $3,829,832 indicates that the water utility is projecting a negative cash balance for the year even after you receive the partial rate increase in May. 12 represents the total costs that are to be recovered from rates. 3.1 FUNCTIONAL COST COMPONENTS Operating Capital Total Expense Cost Cost ($) ($) ($) Revenue Requirements 1 O&M Expenses 5,571, ,571,932 2 Water Supply 1,713, ,713,100 3 Debt Service 0 1,409,900 1,409,900 4 Transfers 0 4,500,000 4,500,000 5 Subtotal $ 7,285,032 $ 5,909,900 $ 13,194,932 Less Revenue Requirements Met from Other Sources 6 Other Operating Revenue 84, ,200 7 Transfers 19, ,500 8 Subtotal $ 103,700 $ 0 $ 103,700 Adjustments 9 Adj for Annual Cash Balance 4,836, ,836, Adj to Annualize Rate Increase (1,006,700) 0 (1,006,700) 11 Subtotal $ 3,829,832 $ 0 $ 3,829, COS to be Recovered from Rates $ 3,351,500 $ 5,909,900 $ 9,261,400 The cost of providing water service should be analyzed by system function in order to properly allocate the costs to the various classes of customers and subsequently design rates. As a basis for allocating costs of service among customer classes, costs may be separated into the following four basic functional cost components: (1) Base ; (2) Extra Capacity ; (3) Customer ; and (4) Direct Assignment. Base costs represent operating and capital costs of the system associated with service to customers to the extent required for a constant, or average annual rate of use. 12 B&V PROJECT NO JANUARY 25, 2017

17 City of Lynwood, CA WATER AND SEWER RATE STUDY Extra Capacity costs represent those operating costs incurred in meeting demands in excess of average, and capital related costs for additional plant and system capacity beyond that required for the average rate of use. Customer costs are defined as those that tend to vary in proportion to the number of customers connected to the system. These include meter reading, billing, collecting and accounting, and maintenance and capital costs associated with meters and services. Directly assigned costs are costs specifically identified as those incurred to serve a specific customer group(s). The separation of costs of service into these principal categories facilitates allocating such costs to the various customer classes on the basis of the respective service requirements of each class. 3.2 ALLOCATION TO COST COMPONENTS Each element of cost is allocated to functional cost components on the basis of the parameter(s) having the most significant influence on the magnitude of that element of cost. O&M expense items are allocated directly to appropriate cost components, while the allocation of capital and replacement costs is based upon a detailed allocation of related capital investment. The separation of costs into functional components provides a means for distributing such costs to the various classes of customers on the basis of their respective responsibilities for each particular type of service. Black & Veatch performed the following steps to derive the allocation percentages for apportioning the City s O&M and capital costs. As noted above, elements that are allocated directly to their cost component include customer costs and direct assigned costs. For volume-related cost allocations, the first step in determining the allocation percentages is to assign system peaking factors. The base element is equal to the average daily demand (ADD) and assigned a value of 1.0. The City s maximum day (max day) demand is estimated to be 1.80 times the ADD. Thus, the max day is assigned a value of The maximum instantaneous usage is approximated by the maximum hourly (max hour) usage and is estimated to be 2.70 times the ADD. Thus, max hour is assigned a value of These peaking factors are based on the City s 2005 Water Master Plan. Cost components that are solely base-related, are allocated 100 percent to base. Cost components that are designed to meet max day requirements, such as reservoirs, are allocated to base and max day factors as follows: Base = (1.0/1.8) x 100 = 55.6% Max Day = ( )/1.8 x 100 = 44.4% Cost components that are designed to meet max hour design requirements, such as Distribution, are allocated in a similar fashion, as follows: Base = (1.0/2.70) x 100 = 37.0% Max Day = ( )/2.70 x 100 = 29.6% Max Hour = ( )/2.70 x 100 = 33.3% BLACK & VEATCH CORPORATION Cost of Service Allocation 13

18 Water and Sewer Rate Study City of Lynwood, CA Allocation of Operating and Maintenance Expense In the allocation of O&M expense, costs are allocated directly to cost components to the extent possible. Expenses such as City Manager, Finance, Human Resources and Technology & Media are allocated on the basis of customer while water billing is allocated on the basis of meters and customer. Public works which represents water operations is allocated based on max hour design requirements as described in Section 3.2. Table 3-2 represents the allocation of O&M to the functional cost components. Upon allocation to function cost components, revenues from other sources as shown in Table 3-1 lines 8 and 11 are subtracted Allocation of Capital Investments In the allocation of capital expenses, costs are allocated to cost components to the extent possible. Capital expenses are made up of two components: capital expenditures and debt service. Capital expenditures represent future capital investment into the water system. These costs are allocated on the basis of total existing assets. A distribution of the new water investment is shown in Table 3-3. Debt service represents payment for old capital investment made into the system. Since there was not definitive records showing the exact projects paid for by existing debt, and because there is a fixed element of cost associated with debt service, debt costs are allocated 30 percent to customers and 70 percent to volume (base). 14 B&V PROJECT NO JANUARY 25, 2017

19 City of Lynwood, CA WATER AND SEWER RATE STUDY Table 3-2 Allocation of Water O&M Expenses Common to All Customers Base Extra Capacity Customer Fire No. Description Total Costs Base Max. Day Max. Hour Meters Cust/Bill. Protection ($) ($) ($) ($) ($) ($) ($) Operating Expenses 1 City Manager 57, , Finance & Administration 476, , , Human Resources 87, , Public Works 6,430,000 2,027,800 1,905,200 2,143, , ,200 5 Technology & Media Support Servic 233, , Transfers Subtotal $ 7,285,000 $ 2,027,800 $ 1,905,200 $ 2,143,300 $ 416,700 $ 759,800 $ 32,200 Less Other Revenue 8 Miscellaneous Revenues 103,700 28,900 27,100 30,500 5,900 10, Other Adjustments 3,829,800 1,066,000 1,001,600 1,126, , ,400 16, Net Operating Expenses $ 3,351,500 $ 932,900 $ 876,500 $ 986,000 $ 191,700 $ 349,600 $ 14,800 Table 3-3 Allocation of Water Capital Costs Common to All Customers Base Extra Capacity Customer Fire No. Description Total Costs Base Max. Day Max. Hour Meters Cust/Bill. Protection ($) ($) ($) ($) ($) ($) ($) Plant Assets 1 Source of Supply 1,332,000 1,332, Pumping 437, , , Treatment 216, ,300 96, T&D 2,143, , , , Meters & Service 216, , Hydrants 21, ,600 7 General Plant 132,200 75,400 28,000 21,600 6, Net Capital Expenses $ 4,500,000 $ 2,564,600 $ 953,900 $ 736,200 $ 223,000 $ 0 $ 22,300 BLACK & VEATCH CORPORATION Cost of Service Allocation 15

20 Water and Sewer Rate Study City of Lynwood, CA 3.3 UNITS OF SERVICE The total cost responsibility for each customer class may be established by developing unit costs of service for each cost function and subsequently assigning those costs to the customer classes based on the respective service requirements of each. To properly recognize the cost of service, each customer class is allocated its share of base, maximum day and maximum hour costs. The number of units of service required by each customer class provides a means for the proportionate distribution of costs previously allocated to respective cost categories. Table 3-4 is a summary of the estimated units of service for the various customer classes. Base costs vary with the volume of water used and are distributed to customer classes on that basis. Extra Capacity costs are those associated with meeting maximum rates of water use, and is distributed to customer classes on the basis of the respective class capacity requirements in excess of average rates of use. Customer costs, which consist of meter related, billing, collection and accounting costs, are allocated to the various classes on the basis of the number of bills and equivalent meters. Equivalent meter ratios are established by the American Water Works Association annual M6; Water Meters - Selection, Installation, Testing and Maintenance. The estimated number of equivalent meters for each customer class is based on the total number of various sizes of meters serving respective classes and the ratio of the cost of meters for the various sizes to the cost of 5/8-inch meters. Private fire protection costs are allocated on the basis of equivalent fire hydrants. The extra capacity units are determined based on a capacity factor between maximum day and maximum hour to average day. Generally, residential customers experience a higher maximum to average demand ratio than the industrial customer class. Maximum hour usage information by individual customer class is not available. As such, assumptions for maximum day and maximum hour ratios for each customer class have been made based on experience with other water utilities with similar characteristics. 3.4 COST OF SERVICE ALLOCATIONS The costs of service are distributed to the various customer classes by applying the unit costs of service to respective service requirements. The total unit costs of service applied to the respective requirements for each customer class results in the total cost of service for each customer class Units Costs of Service The Test Year unit cost of service for each functional cost component is based on the total cost divided by the applicable units of service as shown in Tables 3-5. In lines 1 and 2, the total costs represent the cost to be recovered from rates shown in Table 3-1 lines on Table 3-5 represents the unit costs that are used in allocating the costs to the specific customer classes Distribution of Costs of Service to Customer Classes The customer class responsibility for service is obtained by applying the unit costs of service to the number of units for which the customer class is responsible. This process is illustrated in Tables 3-6, in which the unit costs of service are applied to the customer class units of service. 16 B&V PROJECT NO JANUARY 25, 2017

21 City of Lynwood, CA WATER AND SEWER RATE STUDY Table 3-4 Water Units of Service Consumption Maximum Day Maximum Hour Fire No. Description Annual Avg. Day Factor Total Extra Factor Total Extra Meters Bills Protection (HCF) (HCF/day) (HCF/day) (HCF/day) (HCF/day) (HCF/day) (EMs) (Bills) (EHs) 1 All Customer 2,041,220 5, % 12,303 6, % 20,356 8,053 12, ,236 2 Subtotal 2,041,220 5,592 12,303 6,711 20,356 8,053 12, ,236 3 Public Fire ,397 4,722 1,100 4 Private Fire Subtotal ,775 5, ,177 6 Total Water System 2,041,220 5,592 13,025 7,433 26,132 13,107 12, ,172 1,177 Table 3-5 Water Unit Cost of Service Common to All Customers Base Extra Capacity Customer Fire No. Description Total Costs Base Max. Day Max. Hour Meters Cust/Bill. Protection ($) ($) ($) ($) ($) ($) ($) Unit Cost of Service 1 Net Operating Expense 3,351, , , , , ,600 14,800 2 Capital Costs 4,500,000 2,564, , , , ,300 3 Debt Service 1,409, , , Total $ 9,261,400 $ 4,484,300 $ 1,830,400 $ 1,722,200 $ 414,800 $ 772,600 $ 37,100 5 Units of Service (Total) 2,041,220 7,433 13,107 12, ,172 1,177 6 Cost per Unit $ 2.20 $ $ $ $ 7.01 $ per Unit per HCF per HCF/Day per HCF/Day Per Eq. Meter per Bill per Eq. Hyd BLACK & VEATCH CORPORATION Cost of Service Allocation 17

22 Water and Sewer Rate Study City of Lynwood, CA Table 3-6 Distribution of Water Cost to Customer Classes Common to All Customers Base Extra Capacity Customer Fire No. Description Total Costs Base Max. Day Max. Hour Meters Cust/Bill. Protection ($) ($) ($) ($) ($) ($) ($) per HCF per HCF/Day per HCF/Day Per Eq. Meter per Bill per Eq. Hyd 1 Cost per Unit $ 2.20 $ $ $ $ 7.01 $ Customer Class All Customers 2 Units 2,041,220 6,711 8,053 12, , Allocation of costs of service 8,376,000 4,484,300 1,652,700 1,058, , ,000 0 Public Fire 4 Units , ,100 5 Allocation of costs of service 821, , , ,700 Private Fire 6 Units Allocation of costs of service 64, ,600 43, ,600 2,400 8 Total $ 9,261,400 $ 4,484,300 $ 1,830,400 $ 1,722,200 $ 414,800 $ 772,600 $ 37, B&V PROJECT NO JANUARY 25, 2017

23 City of Lynwood, CA WATER AND SEWER RATE STUDY 3.5 ADEQUACY OF EXISTING RATES TO MEET COSTS OF SERVICE Presented in Tables 3-7 is a comparison of the allocated cost of service and revenue under existing rates by individual customer class and for the system in total. The indicated revenue increase required over existing rates for each user class indicates where the emphasis should be directed in the subsequent rate design of water service user rates. The 15.0 percent, overall increase is considered necessary to meet the projected revenue requirements for the FY 2017 Test Year. This overall level of revenue needs to be produced by the proposed rates developed and presented in subsequent sections of this report. Table 3-7 Comparison of Water Cost of Service to Existing Revenue Allocated Beneficial Use Adjusted Rev under Indicated No. Description COS Allocation COS Exst Rates Rev Increase ($) ($) ($) ($) (%) Customer Class 1 All Customers 8,376, ,300 9,197,300 8,029, % 2 Public Fire 821,300 (821,300) % 3 Private Fire 64, ,100 24, % 4 Total $ 9,261,400 $ 0 $ 9,261,400 $ 8,053, % BLACK & VEATCH CORPORATION Cost of Service Allocation

24 Water and Sewer Rate Study City of Lynwood, CA 4 Proposed Rate Adjustments The initial consideration in the derivation of rate schedules for water service is the establishment of equitable charges to the customers commensurate with the cost of providing that service. While the cost of service allocations to customer classes should not be construed as literal or exact determinations, they offer a guide to the necessity for, and the extent of, rate adjustments. Practical considerations sometimes modify rate adjustments by taking into account additional factors such as the extent of bill impacts, and local policies and practices. 4.1 EXISTING RATES The water utility s existing rates consists of a readiness to serve charge and a commodity charge which is a uniform commodity rate for all customer classes. In addition, there is a fire line charge for fire service connections based on meter size. A summary of existing water rates was presented earlier in this report in Table PROPOSED RATES The costs of service analysis described in preceding sections of this report provide a basis for the design of water rates. As observed in Table 3-6, the cost of providing service compared to the revenues received from different customer classes is not uniform. That is, for some customer classes the cost of providing service is greater than the revenues received. The 5-year rate schedule is shown in Table 4-1 which takes into consideration water utility objectives. The water rates for all customer classes will keep the current rate structure which consists of a readiness to serve charge plus a commodity rate. The readiness to serve charge will be based on meter size. The commodity rates incorporate the amount of water consumed. A unit represents 100 cubic feet of water. Under the uniform rate structure, users pay the same commodity rate regardless of usage amounts. Table 4-1 Proposed Water Rates Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Description ($/month) ($/month) ($/month) ($/month) ($/month) Readiness To Serve Charge 3/4" " " " " " " " Commodity Charge ($/HCF) ($/HCF) ($/HCF) ($/HCF) ($/HCF) All Customers B&V PROJECT NO JANUARY 25, 2017

25 City of Lynwood, CA WATER AND SEWER RATE STUDY Readiness-to-Serve Charge The readiness to serve charge includes a portion of the cost of meter maintenance, reading customer meters, issuing bills, general fire protection costs, and accounting/financial administrative costs associated with customer account. As noted previously, the meter service charge increases with increasing meter size. The meter ratio used follows those recommended by AWWA and recognizes that as meter size increases, so does the capacity. For example, customers with a 4 meter have an expectation of being able to use more water (at a higher flow capacity) than customers are with a 3/4 meter. Consequently, the City s water system must be prepared to provide each customer the level of service expected from his or her meter connection when the tap is turned on. Table 4-2 demonstrates the development of readiness-to-serve charges. Table 4-2 Readiness-to-Serve Development Meter Billing Public Fire Service Total Unit Meter Adjusted Adjusted Adjusted Service Description Cost Ratio Unit Cost Unit Cost Bill Ratio Unit Cost Unit Cost Ratio Unit Cost Charge per EM $ per Bill $ per EM $ $/Monthly 3/4" $ $2.80 $ $7.01 $ $5.53 $ " /2" " " " " " Fire Service As part of the services provided by the water utility, 92 accounts that have a private water line connection as well as 1,100 fire hydrants that are tied to the water system for fire protection. To meet fire protection demands, the City must design, operate and maintain a water system that can meet peak fire demand requirements. Public hydrants are of beneficial use for all customers therefore costs are allocated to each customer class. Private fire services are charged based on the diameter of the line that connects to the water system. The results of the cost-of-service analysis conducted herein indicate that an increase from current fire service charges is necessary in order to achieve full cost recovery as shown in Table 4-3. Table 4-4 demonstrates the development of fire line charges. Table 4-3 Proposed Fire Service Rates Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Description ($/month) ($/month) ($/month) ($/month) ($/month) Fire Charge 1" " " " " " " " BLACK & VEATCH CORPORATION Proposed Rate Adjustments

26 Water and Sewer Rate Study City of Lynwood, CA Table 4-4 Readiness-to-Serve Development Billing Public Fire Service Total Adjusted Adjusted Service Description Unit Cost Bill Ratio Unit Cost Unit Cost Ratio Unit Cost Charge per Bill $ per EM $ $/Monthly 3/4" $ $7.01 $ $3.33 $ " /2" " " " " " REVENUE RECOVERY UNDER PROPOSED RATES As previously discussed, the proposed rate schedule shown in Table 2-9 would increase rate revenues by the average system-wide cumulative increase of percent over the study period and maintain current cost recovery by customer class, as indicated in Tables 4-5. Table 4-5 Comparison of Water Cost of Service to Proposed Revenue Adjusted Rev under Percent No. Description COS Proposed Rates Recovery ($) ($) (%) Customer Class 1 All Customers 9,197,300 9,197, % 2 Private Fire 64,100 64, % 3 Total $ 9,261,400 $ 9,261, % 4.4 NEIGHBORING WATER UTILITIES Presented in Table 4-6 are the proposed rates compared to rates of neighboring cities/agencies, for a single family residential customer with a 5/8 or 3/4 meter consuming 12 hundred cubic feet monthly. Based on the comparison, the City is currently in the bottom of water providers in the area, but with the proposed rate increases, the City moves to the middle of water providers. All surveyed community rates are current as of September The City existing bill for 12 units is $49.77 and is anticipated to increase to $ B&V PROJECT NO JANUARY 25, 2017