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Agenda Bill PresentationPart3 11/1/2010
CITY OF PE TALUMA City of Petaluma FY 09 -10 u WATER AND WASTEWATER FINANCIAL PLAN AND RAT STUDY Exhibit, II =S ntof Water Resources and Conservation Five -Year Fir anclal Plan FY 10 -11 Budget FY 1,1.12 FY 12-13 FY 13 -1 ° 3 0 "/ CY Overall Rateartcreases (1) - -> 5:0% 2.D% 3.01 ° Estimated FY SCWA Pass-Through Adjustments (2) -•> 4.4% 4.8% 5.0% WATER OPERATING FUND Net Spendable Assets Beginning Bat. 6,065,333 3.030,937 2,852,000 2;979,000 3,149;000 Revenues 9;345,514 9.818 10 10,923,000 11,810,000 Water,UserCharges. 444,000 520.000 595,000 Auto Adjustment Incremental Rev. 1,3 87,993 1,458,000 1,510,000 1,550;000 1,599,000 Wat Charges 88,958 94:000 97,000 100,000 104,000 Fire HydranVSprinklerCharges 30 35,000 36'.000 37,000 38,000 Recycled Water'Sales 266,676 200,000 204,000 210,000 216,000 Charges for Services 139,300 Capacity Fees Intergovernmental 459 160,000 163,000 168;000 173,000 Other Revenue 115,434 15,000 000 29, 30000 63,000 investment Earnings 11,833.854 11;780;000 12,686;000 13,538,000 14 Total Revenue Expenditures' and Transfers. ` 763,835 1,202;850 1,227,000 1,264,000 1,302,000 Water.Administration 940;500 712 727,000 749,000 771,0 Intergovernmental Transfers 522,905 608,250 620,000 639,000' 658,000 Conservation 431,571, 609,700 622,000 641,000 660,000 Customer Service 86,485 103,300 105,000 108,000 111,000 Leak Detect. /Cross Connect. 21,476 80,000 82,000 84,000 87,000 Water Pumping: 156;391 143,000 114,000 80 42,000 Electricity Source of Supply (SCWA) 3,794,900 4,355,000 4,874,000 5,551,000 2,070;000 6,319;000 2,132,000 TransmissionlDistribution 1,884,155 1;970,700 120,000 2,010;000 126,000 132,000 139,000 Electricity 103,807 648,563 653,000 652,000 650,000 652.000 Debt Serv. - 2001 Wtr Bonds Capital Projects • 263,663 1,400;000 - 1,400;000 1,400,000 1,400,000 Transfer to Capital fund Total Expend. and Transfers 9,618,251 11,958;450 12,559,000 13,368,000 14,273.000 8,280,937 2,852,000 21979 000 3,149;000 3,474,000 Ending Balance 2,177.000 2,476,000 2,627,000 2,830,000 3,055,000 Operating Rese ve (25% of 08M) 6,103,937 376,000 352;000 319 ; 4 419,000 Available Balance 4.82 3.83 4.35 4.41 5.19 DS Coverage (w! CFs), 1:25 min. 4.61 2.91 3.40 3.43 3.67 DS Coverage (w10 CPs); 1.00 min. WATER,C 7�n&T�ansfers UND 5,250,000 4,082,000 722.000 894,000 Net Spenets'Beglnning Balance Revenue 601,000 619,000 638,000 986,000 Water es 1,400,000 1,400.000 1,400.000 1,400;000 Transfrating Fund - Grant)Debl Proceeds 26,000 41,000 7,000 18;000 Investment Earnings 2,027,000 2,060,000 2,045,000 2,404,000 Total:Revenue: Expenditures and•:Transfers 2,525,000 Pablo Lane Reservoir E. Wash. St (101 to Edith) 18' Main Replan 2,073,000 E. Wash. =St(Edi1h to Bridge) 18" Main Replac. 164,000 2:163,000 22;000 515;000 , Wash. St. North 18 Replac. 25,000 38;000 39,000 40;000 Pump$tations Emergency Power Petaluma Blvd, North 12" Main Extension 1,475;000 Casa Grande Road 16" Main Extension 15 000 15,000 281,0130 290,006 Main Replacements 2010 Various 300,000 309;000 318,000 328,000 Automatic. Meter Read Replacement • 361,000 Hardin Tank' Exterior Recoating 280 - - 2010 Urban Water Management Plan Transfer to WW Cap Fund for Recycled'Wtr Pro). 338,000 348,000 359,000 555,000 3,195,000 5,420,000 1,873.000 2;668,000, Total Expenditures 4,082,000 722,000 894,000 610,000 Ending Balance Notes: January 2012, reflects assumed annual indexing of water rates to changes in the: San Francisco CPI. (1) Beginning adjustment of water usage charges to reflect changes in SCWA wholesale water rates (2) Reflects estimates ol:proposed automatic THE REED GROUP, INC. DRAFT - 10/27/2010 FY 14 -1 3.0% 5-3% 3,474,000 12,808,000 674,000 1;651,000 108;000 39;000 222,OOD 178,000 69,000 15,749,000 1,341,000 794,000 678,000 680,000 1 t 4,000 90,000 7,189,000 2,196;000 146;000 648,000 1,400,000 3,307.000 640.000 5.48 3.91 610 1,o15.000 1;400, 000 12,000. 2,427,000 101..OD0 298,000 338,000 571;000 1 PAGE 21 WATER AND WASTEWATER CITY OF'PEfALUMA FINANCIAL PLAN AND RATE Current , Situation The estimated working capital balance (net spendable •assets) in the water, utility as of June 30, 2010 was about $8.28 million: As the capital fund is a', new 'fund, the 'financial plan. model shows the'beginning balance for FY 10 -1`1 split betweemthe operating and capital funds. The operating fund is shown to have a balance of about: $103 million, ,and the capital fund is shown to'have a beginning balance of $5.25 million in order to provide sufficient funding; for planned capital improvements. ,Fund balances are calculated for the end of each year based on annuaLrevenues, expenditures, and transfers. Water Utility ■ Operating Fund $3,032;000 Capital Fund (new in. FY 10 -11) $52501000 Total Water $8,282 ' In January 2Q11, the City plans to implement the fifth of.five annual 5 percent water rate increases. These rate increases have' been necessary to cover the increasing: costs of operations-including significant cost increases from the SCWA, in the. face of reduced water demands, and growing maintenance costs of an aging infrastructure system. The most significant anticipated increase in costs within the: water utility 'is the cost of water purchases from SCWA. SCWA has indicated that annual rate increases of 10 ,percent may be needed over the next five years. Between an assumed 10 percent increases.in the:wholesale cost of water and the :assumed gradual shift away from using groundwater during the planning period, ' annual water purchase costs are estimated to increase from about $4.4 million in FY 10-11 to About $72 million in FY 14 -15. As described in greater detail in', Section III of this report, the; City has the ability to adopt a mechanism for automatically adjusting watecrates to `reflect the affects of changes in the cost of wholeisale.water purchases: This would be a prudent,action to' help ' reduce the financial risk within, the water utility from uriezp"ected or underfundetl increases by Sonoma County Water Agency. At present (FY 10 -11), the water utility is estimated to have an operatngisurplds of About. $1.2' million after covering operating and maintenance; expenses and debt service payments. It is recommended thatbe City transfer $1A. million from the water operating 'fund to the capital fund in .FY Y' 10 -11 in support of the capital improvement program. This transfer ,will" result in a :reduction in the,FY 10 -11 year -end balance in the operating °fund, however that balance-will remain above the 25 percent operating reserve recommended. As a point of reference, the average planned water capital, program expenditure for the next five years'is about:$2.5 million. In addition to the $5.25 million initial balance 'in the capital fund, capacity fee, revenues accrue to the capital fund:. With the assumed' growth reflected in the financial planningranalysis (see Exhibit II -2 ) annual capacity fee revenues accruing 'to the water capital fund may total labout $19 million over'the next five years. In order to support the water capital improvement program annual transfers to thecapital fund:are shown to remain ,steady at $1:4 million per year beginning through the planning period. Coincidently, annual depreciation within the water utility is about $1.3 million so capital program transfers of >this magnitudetappear reasonable. Because most.of,the capital expenditures of the next five. years are anticipated to. occur in the next two years, the balance- in the capital fund will be drawn down to minimal levels' The City should closely monitor the cash available in the•capital fund and may need to adjust the timing of capital project expenditures to. meet the availability of cash in the near term. No new debt, however, is THE REED GROUP >INC. DRAFT- 10/27/2010: PAGE 22 WATER AND WASTEWATER CITY OF PETA6UMA FINANCIAL PLAN AND RATE STUDY expected necessary to fully fund planned water system improvements over the next five years. If there arel significant changes to the capital improvement program, then higher water rates and /or new long -term debt might needed to fund the program. ' Because the water system has relatively little; outstanding long -term debt, debt service coverage . requirements are easily met and do not impa ct the need for further water rate increases. An option - may exist inr the future, 'if. deemed,economical, to refinance existing debt within the 5-year period to dower interest rates and costs. Water,System Operating Reserves Municipal water wastewater utilities generally maintain operating reserves equal to from 10 to 50 percent of annual operating costs. The water system financial plan maintains the operating fund in excess of 'a s25 percent operating reserve throughout the planning period. This can be accomplished with water rates adjusted to match changes in the cost of SCWA water purchases, as well as a modest annual rate adjustment equal to the rate of general inflation. Given the nature of the City's water system (primarily - distribution of treated water purchased from SCWA, with limited groundwater usage), a 25 percent operating .reserve should be sufficient for working capital and emergency purposes,, particularly if mechanisms for adjusting. water rates for changes in SCWA costs and for general.inflation are implemented, as well as a positive balance is maintained in the capital fund. Water System Conclusions and. Recommendations While the cash position within the water utility is rather lean, especially considering pending capital improvement needs" t'is financially stable. Current water rata andother revenues are sufficient to meet current financial obligations, including contributing to an ongoing pay -as- you -go capital improvement program. As noted previously, any'change to the °capital improvement program could ' result in different financial needs, including increased water rates and /or the need for debt financing. ' Based "on analyses perf ormed, it appears that the most significant financial risk to the water utility is related to the cost of wholesale water purchases from the SCWA. This risk can be reduced by adopting a mechanism for automatic water rate adjustments that would offset the impact of SCWA water rate changes (see Section III for details). Beyond that, it appears that J' inflation =only water rate adjustments should be sufficient during the 5 -year planning period under review. Because of the current relatively stable status of the water utility, financial plan recommendations, are limited to the following: Adopt a mechanism for automatically adjusting water rates to reflectchanges in wholesale water purchase costs from SCWA, as described in Section III of this report. The SCWA historically has adjusted its water rates annually effective in July of each year. Increased revenues from automatic rate adjustments are reflected in the financial plan model based on assumed annual 10 percent SCWA rate increases. The proposed automatic adjustment formula would, however, tailor the amount of the adjustment to the specific action by SCWA. Only the City's water usage rates would be affected by this adjustment (not fixed monthly service charges). As illustrated in Section III of this report, a 10 percent increase in the wholesale cost of water in FY 11 -12 would result in a 4.4 percent increase in the City's water usage, rates. THE REED GROUP, INC. DRAFT - 10/27/2010 PAGE 23 CITY OFPETAL"UMA WATER AND WASTEWATER FINANCIAL PLAN - AND RATE STUDY Beyond the�scheduled 5 percentrate adjustment.in January 201'1;, the Cityshould adopt a mechanism for adjusting,water rates annually, in January 'to reflect the changes in general' inflation. using the San Francisco CPI for this purpose: The financial plan, assumes general inflation to .be'2 percent through FY' 11-1 2 and 3 percent thereafter. Water rate revenue projections reflect annual. increases of this magnitude beginning in January 2012. This rate adjustment would apply to theentire water rate structure: ■ Maintain an operating reserve in the operating fund equal to at)east 25;percentofannual operating and maintenance expenses, exclusive of debt service and transfers to the. capitalfund. Beyond the near -term need's of the water .utility, consider increasing' the ,annual transfer from the;operating fundto the capital fund consistent with long -term capital :improvement needs (to be determined) with consideration of -capacity :fee revenues and, avail able reserves. Rehabilitating'and upgrading the. water system to maintainservice - capability °for the,long =term is an obligation of cu and should.be considered in evaluating the financial' performance of the water system. While the: $1A ,million, annual transfers reflected in the financial' plan appear adequate for the 5 -year planning period, higher amounts may be 'justified in the 'future, particularly as changes. are made to the utility's capital. improvement program. In conclusion„ the water system appears to be in a financially stable condition. However, anticipated increases in operating ;and maintenance costs (principally water purchase costs) justify continuing 'to adjust water rates. to .reflect inflationary ,pressures. While the assumptions and information used in the 'Preparation of the water system financial plan, are; 'believed to be reasonable, no assurances can, be made that actual financial results will be'as presented herein. City staff'should continue to monitor the�financial condition,ofthe water, utility, as well as changes in Water demands' and related rate revenues, to ensure that the utility continues a sound financial course. Wasteweiter System ,Financial' Plan. The wastewater system financial plan: is an; annual cash flow model that 'reflects beginning balances',,revenues,and transfers in, expenditures andtransfers out, and ending balances for each fund each year of .the planning period. The financial plan includes unaudited actual FY 09-10 revenues and'expenditures and then looks forWard based onthe budget o..ff ' 1 d 11. Future year operating and maintenance. expenses are based on the FY 10-11 budget with adjustments for inflation and growth. The ,wastewater system fiancial plan model is presented in Exhibit 11 -6 (operating fund) and .Exhibit 11 -7 (capital'4und). THE,REED GROUP INC. DRAFT - 10127/2010 PAGE 24 1 DRAFT - 10/2712010 PAGE 25 THE REED GROUP, INC. CITY ©F PETALUMA WATER AND WASTEWATER FINANCIAL PLAN AND RATE;STUDY Exhibit 11-6' tClty`of Petaluma - Department of Water Resources and Conservation Wastewater;Utilit Five -Year Financiar,Plan ' FY 09 -10 FY 1041 Unaudited Budget FY 11 -12 FY 1243 FY 13-14 FY 14.15. CY Overall Rate Increases (1) - -> 9% 3.5% 4.5% 4.5% 4.5% ' 'WASTEWATER OPERATING FUND Net Spendable Assets Beginning Balance 23,945,480 12,551,496 2,721,000 2,489;000 2,835;000 2,598,000 Revenues Wastewater User Charges 12,921,775 13.378;000 13,824,000 14,405,000 15,083 15,800,000 Wastewater Service Charges 4,066,330 4;412 4,887,000, 5,093,000 5.333,000 5,587,000 2,133,000; 2;229,000 2,329,000 industrial User Charges 1,492;941 1;655;000 2,051,000 398,771 451;000 472,000 489,600 512 536;000 Penngrove User Charges Capacity Fees 139,441 Intergovernmental 49,334 55,00() 56,000 58,000 60.000 62;000 ' Other Revenue Debt Proceeds 2 15.200,000 Grant Investment Earnings 219,478 419,600 80,000 47,000 35,000 57,000 52,000 Transfer from Capital Fund DS 282,000 291 300:000 462,000 477,000 ' Transfer from Rate Stabilizatiton Fund - 1,500,000 1,000,000 1,000,000 - To4atRevenue 21;966;680 37,013,000 22,628;000 23,513,000 23;736,000 24,843,000 _ Expenditures and Transfers Wastewater Administration 9521997 1,719,750 1,754;000 1,807,000 1,861,000 1,917,000 IIntergovernmental Transfers 1,036;100 848,050 865,000 891,000 918,000 946,000 438;000 451,000 465,000 Industrial Pretreatment 301'1892 416,250 425,000 557,448 820,100 837.000 862 888,000 915,000 W' stewater Storm Drainage 788,515 1,434.650 1,463,000 1,507,000 1,552,000 1,599,000 Collection System Reclamation 294,393 527,700 538,000 554 571,000 588;000 Electricity for Pumping 316,298. 478,000 502 527,000 553 581,000 368,000 Customer Service 589,309` 330,650 337 1,994,124 1;5_26;050 1,557,000 347,000 357,000 1,604, 000 1,652, 000 1,702, 000 Treatment Chemicals, Electricity, Nat. Gas 1,291,941 1,322,500 1,389,000 1,431,000 1,474,000 1,518;000 Debt Service- 2000 WW Bonds Debt Service- SWRCB'SRF Loan 718,374 724,000 722,000 7,501,650 7,857,000 7,857,000 725,000 726,000 725,000 7,857,000 7,857,000 7,857,000 I ' Debt Service - Revolving LOCs 396,540 25.339;000 1,114,000 1,117,000 1,113,ODO 1,114,000 Debt Service - 2011 WW Bonds, ' Capital Projects Transfer to WW Capital Fund 3;121,084 3,500,000 3,500 3,500,000 4,000,000 4,000,DDO Transfer to Rate Stabilzation Fund 3;500,000 Total Expend. and Transfers 23,360,664 46,843;900 22;860;000 23;167,000 23,973;000 24,295;000 Ending Balance v 22,551,496 2,721,000 2,489,000 • - 2;535,000 2 598;000 3,146,000 ' Operating Reserve (25% of 0 &M) 2,031 000 2,356;000 2,417;000 2;492;000 2,569,000 2,650,000 343,000 29,000 496,000 -__ Avallable',Balance DS Coverage (w/ CFs` &RSF)'; 1.25•min. 20,520,496 365,000 72,000 1.32 1.40 1.40 1.45 1.47 1.55 DS 'Coverage (w /o CFs & +RSF),, 1.00 min. 1.30 1.15 1.22 1.26 1.34 1.42 Notes: (1) Beginning January 2012, reflects assumed annualindexing of wastewater rates to changes in the San Francisco CPI, plus 1 S percent. current Situation The estimated working capital balance (net spendable assets) in the wastewater utility as of June 30, 2010 was about $22.5,5 million. As the capital fund' is a new fund, the financial plan model shows the. 'beginning balances for FY 10 -11 Split between •the operating and capital funds. The_ operating fund iS:,shown to have.a: balance of about $12.55 million, and the capital fund .a beginning balance of $10.0 million. In addition, the City established a rate'stabilization fund for the purposes of assisting in meeting debt service .coverage obligations. The rate stabilization fund had ,a June based 30, 2010 balance of $35million. Fund balances are calculated for the end of each year on annual revenues, expenditures, and transfers. - 1 DRAFT - 10/2712010 PAGE 25 THE REED GROUP, INC. WATER AND WASTEWATER CITY`OF PETALUMA FINANCIAL PLAN AND RATE STUDY Exhi61t'lf 7 City of Petaluma VVASTE WATER: CAPITAL.FUND Net Spendable Assets: Beginning' Balance Revenues and Transfers Wastewater Capacity Fees Transfer from Wtr Fund (WtrCap Fees) Transferirom Operating,Fund SRF Loan Proceeds Investment Earnings' Total Revenue Expenditures Wastewater Projects C.Streei PumpZlation Upgrade Demolition of Hopper WWTF Water Recycting,Facility Ellis Creek SCADA Ellis Creek WRF Wilmington Pump. Station Oxidation Pond'Levee Reinforcement Sewer Main Replacement 20i 10th St. Water- & Sewer MaKReplacement Mi. View Sewer Reptac:- Purringt'bn ; to Petaluma Sewer Main Replacement 2010 Various Manhole Rehabilitation Lift Station Upgrade Mi View Sewer Replac.- Halsey to.Gienilon Pond Influent�Pump Station Grinder,lnstali. Recycled N!ater Projects Phase 26 Recycled Water Pipeline and Reservoir' Phase 2A Recycle_ d Water Pipeline Phase 3 Re Water Pipeline Recycled Water Pump Station Main & 1 Improv Transfer to Operating Fund for Ellis Creek WRF DS Total Expenditures Ending Balance RATE STABILIZATION, FUND ''Beginning Balance Transfersiln Transferfrom;Operating Fund 3501 conservation 1. . FY'lb -m FY 11 -12 FY 17 -13 FY 13 -14 10,000,000 16,929;000 1 944 964,000 418;000 431,000 444;000 685!000 706;000 338;000 348,000 359,000 b55,000 571,000 3;500;000 3,500,000 3,500 4,000,000 4;000:000 , 9 ; 300.000 1,402.000 179;000 842.000 50,000 169.000 13,000, 19.000. 19:000 13,606.000 4 4;316.000 5,259.000 5.296;000 1,837 1,725 - - 55000; 57;000 58,000 60,000 62,000 510,000 434:000 3711000 266,000, - 1,402.000 179;000 842.000 876'.000 15,000 664 334:000 344.000: 62;000 237;000 1;555,000 374,000 2B2;000 551 568,000 5851000 602,000 - ' 1,,061 2 - - 30 000 350,060 998,000 305:000 7;727;000 25,OOD 3;205;000 - . 514,000. 871000 2;946.000 3,615;000 2130,000 809,000 2Bzo00 291 300,000 462;000 477;000 - 3;500,000 2,000,000 1,000,000 Total Transfers in 3,500;000 Transfers Out Transfer Operating Fund 1',5001000 1;000;000 1,000;000 Total Transfers out 1 ^;500;000 . 1;000(000 1,000,000 Ending Balance 3,500,000 2 1;000;000 Wastewa ter Utility Operating ,Fund $12,551, Capital Fund (new in FY 10 -11) $10,000,000 Rate Stabilization Fund $3,500,000 Total "Wastewater $26;051 „000,. In January 2011, the City plans to implement the -fifth. of five annual 13 percent wastewater rate increases. These rate increases Have been necessary`to cover the�bosts of operations, including new debt service payment opligations. Based on 'the financial analyses and underlying assumptions presented,herein;,The! Reed Group; Inc. 'believes that this lastrate increase could be reduced from 13' percent to 0 percent: 'Imaddition, it -, appears,that annual rate' increases tied to the 'rate of inflation plus -1.5 percent, beginning in January 12012, shouid'be sufficient'for the five -year planning period (subject to a 2.0 percent minimum). T INC. DRAFT - 10127/2010 PAGE26 WATER AND.WASTEWATER ' CITY OF PETALUMA FINANCIAL PLAN ANDRATE STUDY Initial start=up costs for a new treatment facility are normally higher than ongoing costs. The actual ' operating costs fort he new Ellis Creek WRF appear to be.,lower. than originally projected by the City. :Part of the reason is that the City was able to purchase power and chemicals through group purchase agreements. As,operating.the new treatment facility settles'into a known routine, the City should be able toanticipate and budget operating costs with greater certainty. The financial • situation in the wastewater operating fund in FY 1.G.,1 1. (as presented in Exhibit 11 -6) is complicated by the repayment of LOCs: Nearly.ten,million dollars of the beginning fund balance in FY 10 -11 was used to make initial repayment of,LOCs on July 1, 2010. By June 1, 2011, the City ' is required to repay the remaining $14.75 million; principal'balance owed to LOC banks. The June 2011 payments are planned to be made from ,debt,proceeds. The information on the wastewater operating fund for FY'10 -11 in Exhibit, 11 -6 reflects all of these financial transactions,'as well as the ' operating, activities and other debt service obligations of the utility. The City is required to maintain certain debt service coverage levels as part of its debt obligations. ' In FY 09 -10, the City established and funded a rate stabilization fund with $3.5 million. The financial plan shows the rate ,stabilization fund being drawn down over the next three years to help make debt service, payments and to provide the required level of : coverage. By the time the rate stabilization fund is exhausted, debt obligations need to be fully supported by current revenues. After considering the above financing activities, as well as ongoing oper "ation and maintenance costs ,and annual debt service obligations, the wastewater operating fund is estimated to have available,about a $3.5 million in FY 10 -11 'to transfer to the-capital fund. In subsequent years, the net operating surplus continues to support the' capital improvement program. The financial plan indicates <$3.5 million transferred to the capital fund in FY 11 -12 and FY 12 =13, then increasing to $4.0 million in the ast two years of the planning period. As a point of reference, the average planned capital program expenditure for the next five years is about $7.9 million. The planned program was intended to help begin to address long- deferred maintenance of major infrastructure components. In addition to the .$10 million initial balance in the capital fund. the City, anticipates receiving a final loan `disbursement& $9.3 million from the SW RCB as final reimbursement of costs under the SRF loan: In addition, it is estimated that capacity fee revenue may total about $750 000 in FY 10-11 and grow to about $1,275,000 by FY 14 -15. This includes both wastewater capacity fee'revenue, as' well' as the portion of the water capacity fee revenue (transferred from the water capital fund) related. to recycled water projects. Capacity fee revenue estimates are .also directly related to ' assumptions on new development activity (as previously described); actual development activity 'could . higher or lower than the amount reflected in the analysis. Because a portion of the wastewater e capacity fee is related to costs of the Ellis Creek'WRF 67.5 percent of'wastewater capacity fee'revenue is shown transferred. from the capital fund to the operating fund in support of annual debt service SRF loan.. This is an appropriate use of this revenue and consistent with the intended purpose and use of the fee revenue. Between the initial capital fund balance, the final SRF loan disbursement, annual transfers from the operating fund and capacity fee. revenues, it is estimated that the wastewater utility will have sufficient funds to cover all currently planned capital program costs for the next five years. The exception. is the decommissioning and demolition of the Hopper Street wastewater treatment plant. However, as discussed earlier in this section, final decisions regarding that facility require further analysis, and demolition costs have been excluded from the analysis herein. The significant finding, however, is that it appears that the City may not need additional long -term debt financing for currently planned wastewater and recycled water. projects for the five -year planning period covered by this study. THE REED GROUP, INC. DRAFT — 10/2712010 PAGE 27 `CITY OF PETALUMA Wastewater System Operating Reserves. WATER AND WASTEWATER FINANCIAL PLAN AND RATE STUDY Municipal water and wastewater utilities often maintain operating !reserves equal to from 10 to 50 percent of 'annual operating costs. The.wastewater system' financial plan maintains the operating fund in excess' of a 25 percent: operating reserve throughout the planning period. This can be accomplished with wastewater rates adjusted to match changes=in the,rate of'general inflation, plus 1:5 ,percent (subject to a 2:0 percent minimum). Should the wastewater utility recognizej higher than anticipated.. rate revenues as a result of a rebound in usage, the City:might�find it, possible to establish and then maintain a. higher operating reserve. Given that nearly. one -half �o the wastewater utility's annual operating expenses,.are ;fixed debt service payments, a 25 percent operating reserve should be sufficient for. working capital and emergency purposes, particularly'if- a:positive balance is maintained inahe capital fund. Potential Impact of the Wastewater Initiative ;In the.summer of 2009 a proposed :ballot initiative'(Measure U) seeking to reduce wastewater rates , to the levels that existed ,in January 2006; obtained sufficient ?signatures to be placed on the ballot. `Measure, U is- scheduled to be before voters during the November 2,010 election. The ,pfaced analyses presented, up to this point m the report assumed thatthe initiativb1ails and that no rollback in the wastewater rates would be. required. In preparing this report, The Reed Group Inc. was asked to assess the potential.impacts if'Mbasure,U garnered sufficient votes to cause a rollback to the wastewater rates. That analysis is summarized'here. Reducing wastewater rates to the levels that existed, in January'2006 would mean a rate reduction of about 38.7 percent 'from' the current (2010) wastewater rates, or a reduction of about 45.7 percent.from the rates approved !in 2007'for January 2011. If this occurs, and no other changes are made, annual wastewater rste revenues for 2011 would be reduced from an estimated $21.47 million (under rates scheduled to go into effect in January 2011) to $11.62 million (under rolled back rates). A reduction in the, wastewater rates, could have severe implications forthe wastewater utility. The full consequences of a rate rollback would depend on. the actions taken! by the City in response to the rollback. For the discussion presented herein,;the following assumptions have been made: • The wastewater utility would continue normal operations. • With few exceptions all wastewater and recycled water projects not already under contract would be deferred in order to conserve cash within the utility. • The wastewater utility would make required debt service payments in -2011 on the 2000 wastewater revenue bonds and the SRF'loan as scheduled .using cash from the operating, 1 capital, and rate stabilization funds. • The City would be unable: to. issue the new long -term debt needed to repay LOCs totaling approximately $14:75 million, which is due 'for-'repayment by June 1, _2011. • Two.to, six months would be required to;approve' and implement new "wastewater rates,. • Unknown. legal costs might be incurred in contesting'the,validity of the wastewater initiative and /or adopting;new wastewater rates. 1 THE REED GROUP, INC. DRAFT - 10/27/201'0 -PAGE 28 CITY OF PETALUMA WATER AND WASTEWATER FINANCIAL PLAN AND RATE STUDY Under this iscenario, as soon as wastewater "rates; are reduced the City would be in default with debt obligations under the 2000 wastewater revenue bond`s_, the SRF loan, and LOC agreements. The specific requirements for maintaining wastewater rates at specified levels were detailed earlier 'in this Section, and not'repeated here. If new wastewater rates could not be approved and implemented within a few months of the rate rollback; The Reed Group, Inc. believes that the City would need wastewater. rates higher than the level'proposed for 2011 (9 percent increase over 2010 rates or 4 percent decrease over previously approved rates for 2011)'in order to meet obligations associated with the 2000 wastewater revenue bonds and the SRF loan. During a six - month period the utilitywould lose about °$4'.7 million in: rate revenues' with reduced rates: Such a loss could prevent the City from repaying LOCs, and could preclude the City from, constricting needed wastewater system rehabilitation projects. If the City were unable to bring, wastewater rates`to'l'evels proposed in this report within a few months, then it most likely would be necessary to increase the rates above those proposed for 2011. Estimated operating and maintenance costs in FY 11 -12 are about $9.7 million. Debt service payments on the 2000 wastewater revenue bonds and the SRF loan are estimated to be about $8.6 million in FY 11 -12. Combined, these total about $18.3 million. With reduced wastewater rates, annual rate revenue would be about $11.65 million. Non -rate revenues available for operating or debt service costs may be an additional $400,000. This would leave an annual deficit of about $6.25 million. It also does not reflect the need to repay LOGs or the cost of any capital improvement projects or emergency system repairs. Cash reserves .would only be able to bridge the deficit `for 'a limited ;period of time: It is estimated that available reserves could be totally exhausted within one or two years, without reestablishing adequate wastewater rates. This could occur even without any capital program , activity. The Section : 9212 report presented to the City Council in. October 2009, which describes the potential implications of a rollback in the wastewater rates still accurately outlines the problems that the City will face with a rollback in the wastewater rates. Some of the details may have changed „but the underlying conclusions have not. Wastewater System Conclusions and Recommendations As a result of financing activities, the wastewater utility had a significant cash balances (net spendable assets) at the beginning of FY 10-11. About $10 ,million dollars of the initial balance was used on July 1;2010 to repay a portion of outstanding LOCs,. and a majority of the remainder, is needed for planned capital improvement projects. Although, the City in 2007, approved a 13 '•. percent wastewater rate increase for January 2011, it appears, based on the financial analyses presented herein,;that a 9 percent increase is adequate to cover operating costs, meet debt service obligations, contribute towards the capital improvement program, and maintain an operating ' reserve. The most significant financial risk to the wastewater utility is related to the. potential rollback of rates associated with Measure U on the November 2010 ballot. In the absence of that obstacle, the 'c wastewater utility is poised to begin a period of moderate rate adjustments beginning in January 2012. Assuming Measure U does not pass in November, financial plan recommendations for the wastewater utility include the following: 0 Adjust the wastewater "rates'in 2011 to reflect an overall increase of 9 percent, rather than ' the increase of 13 percent that was approved in 2007. THE REED GROUP, INC. DRAFT` - 10/27/2010 PAGE 29 WATER AND WASTEWATER CITY OF PETALUMA FINANCIAL PLAN AND RRATE "STUDY Beyond the rate adjustment in 201A, the City should.adopt a plan for adjusting wastewater rates annually, in Januaryi to reflect thechanges in general, inflation as.reflected in the San Francisco CPI plus 1.5 percent, as described in 'Section IV of this report. This adjustment would be subject to a 2 b percent' minimum. ■ Issue, additional wastewater revenue bonds:in.the spring of 2011 'sufficient to. repay LOC obligations, but,not foradd tional capital improvement projects. ■ Relyon existing available cash in the capital fund,, asp well as capacity fee revenues and proposed transfers from the operating fund ;to pay for planned wastewater infrastructure improvements and recycled water capital projects. Use funds from the rate stabilization fund as needed over the next several years in order to.meet debt service coverage requirements ■ Maintain a minimum operating reserve in the operating fund equal to atJeast 25' percent of annual operating and maintenance expenses, exclusive of debt service. In conclusion, the wastewater system appears to be approaching a financially stable condition. However, anticipated increases in. operating and,, maintenance costs as well as continuing debt service obligations and capital program needs; justify continuing to adjust wastewater rates to reflect inflationary pressures. While "thee:assumptions and information used', inthe preparation of the wastewater system financial plan are believed to be reasonable, no.:assurances can be made. that actual financial results will be as presented herein. City staff should continue. to' "monitor the financial condition of the wastewater utility,;as well as changes in wastewa ter demands and related rate revenues, to ensure that the utility proceeds on a sound financial course. THE REED GROUP, INC. DRAFT - 10/27/2010 PAGE'30 CITY'OF'PETALUMA W ATER; AN D; WASTE WATE R FINANCIAL PLAN AND• RATE.STUDY This section of the report describes and presents recommendations for updating Water rates to provide sufficient revenues for the water utility's ongoing operations, debt service obligations, and capital improvement` needs. Modification of the water rate. structure is also P, rpposed to improve equity and further encourage water conservation and water use efficiency among the City's water customers. The financial plan -model presented in Section II reflects revenues and expenses on a fiscal year basis. However, the City' has, historically adjusted water rates in January of each year. Therefore, rate analyses must consider calendar year revenue needs. Because the City approved a 5 percent water rate increase in 2007 for January 2011, and the financial plan indicates that that increase is still necessary, the rate analyses presented herein are i revenue neutral (overall) to the rates to be implemented in January.. This way, ; should the City approve .rate structure changes proposed in this report, they could be adopted and implemented ' during 2011 without 'impacting the water utility's overall rate revenues. It should be noted,- however„ that any rate structure change, even in a revenue neutral situation, will, cause some customer bills to increase while others decrease. These changes are in the interest of improved equity and'improved'rate structure performance in relation to rate setting policy objectives (shown on the next page). Existing Water Rates Exhibit 111-1, on the following page, summarizesthe City's current (2010) water, rates as well as the water rates approved in 2007 schedulerto go into effect in January 2011. These two years, of rate schedules are the fourth and fifth years of a five -year rate plan approved at the beginning of 2007. The rate schedules shown in Exhibit III -1, as well as all rate schedules presented. in this report, show rates on a monthly basis. Single family residential customers are subject to monthly service charges based on the size of.the water °meter, as. well as a 4 -tier water usage rate structure. The tier allocations shown in Exhibit [II- 1 are shown as monthly amounts. Multi - family, commercial, institutional, industrial, and irrigation accounts are. also :subject to monthly service charges based on meter size, :and a, uniform °water usage rate'forall water usage. Current (FY 09 =10) water demands reflect that approximately 87 percent of water rate: revenue, is generated from water usage charge and about 13 percent from fixed service charges. Water conservation bests management practices, as promulgated by the California Urban Water Conservation Council, requires at least 70 percent of revenue to be generated by usage charges.. The city exceeds this requirement. THE REED GROUP, INC. DRAFT - 10/27/201.0 PAGE 31 WAT,ER;AND WASTEWATER. CITY OF PETALUMA FINANCIAL PLAN'_AND RATE`STUDY Exhibit III -1 City of Petaluma -- bep`airtment:of -Water Resources and Conservation Previously App roved Water Rates; Notes: (1) '.Effective January 1 each ,year, '(2) Includes multi - family;. commercial,, institutional, industrial, and irrigation accounts. Excludes recycled water accounts. State Setting Objectives The development of Water rate recommendations 'has been guided by several rate - setting objectives. These objectives were reviewed with City staff and include: * Rates should generate sufficient revenues to meet each utility's financial, obligations related to operations, debt service, capital improvement needs, and maintenance of prudent'reserves' • Rates should be equitable by 'reflecting the cost .of providing service to each customer class • Rates should, continue to.encourage water conservation and efficient water use These objectives guided the review of.and recommendations on water rates and rate structures. Customer Account ,Data and Water Use Estimates Water rate calculations .are 'based on a number of factors related to the City's customer 'base. Factors include the, number of customers, customer classes,, meter size, and. actual .water usage. THE REEDtGROUP., INC. DRAFT --:10/2712610, PAGE Jan. 2010 Jan..2011 ,MQnth1k Service. Charges Up'to, 3/4" meter $ 5:4'2 :$ 5.69 1" meter (resid.) $° 6.51' $ 6.84 1 7 ' meter $ 6.73 $ 7..0:7 1 '1/2" meter $ 11 - :81. $ 12.40 2" meter $ 18:54 $ 19.46 " 3" meter $ 3827 $ 40.19 4" meter $ 51.55 $ 54:13 6" meter $ 74.47 $ 78.19 Water Usage Charge ($I co Single-Family Tier 1 (0 -9 hcf) $ 2:83 $ 2.94. Tier 2 (10-18 hcf) $ `3.25 $ 3.41 Ter 3 (1'9 =24 hcf) $ 4.07 $ 4.35' Ter 4., (25+ hcf)' $ 4.50 $ 4.82 Other Customers (2) Ali water usage $; 2.96 $ 3.14 Notes: (1) '.Effective January 1 each ,year, '(2) Includes multi - family;. commercial,, institutional, industrial, and irrigation accounts. Excludes recycled water accounts. State Setting Objectives The development of Water rate recommendations 'has been guided by several rate - setting objectives. These objectives were reviewed with City staff and include: * Rates should generate sufficient revenues to meet each utility's financial, obligations related to operations, debt service, capital improvement needs, and maintenance of prudent'reserves' • Rates should be equitable by 'reflecting the cost .of providing service to each customer class • Rates should, continue to.encourage water conservation and efficient water use These objectives guided the review of.and recommendations on water rates and rate structures. Customer Account ,Data and Water Use Estimates Water rate calculations .are 'based on a number of factors related to the City's customer 'base. Factors include the, number of customers, customer classes,, meter size, and. actual .water usage. THE REEDtGROUP., INC. DRAFT --:10/2712610, PAGE Exhibit.111= 2,summarizes customer account from the City's utility billing system from FY 09 -10. Customer account data is summarized by customer class and meter size. Exhibit III -2 City of Petaluma — Department of Water- Resources and Conservation. Summary of Water Utility Customer Accounts Customer Class U to,3 /4" No. of Connections by Meter Size (-t) 1" 1 1/2" 2" 3" '4" B" Total Accounts Single Family 15 1,575 3 6 - - 5 - 5 17,304 311 Multi- Family 105 463 53 243 45 121 69 209 29 14 3 4 1,057 Commercial 24 35 26 48 6 8 - 147 Institutional - 2 3 4 9 1 2 - 21 Industrial Irrigation 55 143 113 123 5 fi 1', 446 Total Connections 16,369 2,052 312 464 55 24 10 19,286 .Hydr. Capac. Factor 1.00 1.67 3.33 5.33 10.00' 16.67 33.33 No. of 314" Equiv. Mtrs. 16,369 3,427 1,039 2,473 550 400 .333 24,591 Notes: (1) From utility billing system as of August 17, 2010. Customers of different meter sizes can place different demands on the water system. Much more water can be delivered through a 4 ", water meter than through a 3/4" meter. To relate the, potential demands on the water system from customers with different sized water meters capacity factors are used "to determine the number of 3/4" (typical single family dwelling), equivalent water meters represented by the total customer base with variable meter sizes. The ratios of instantaneous, flow capacities of the various meter sizes to the capacity of`a 3/4" meter are used to determine the 3/4" equivalencies. This capacity relationship across meter sizes is generally used to allocate capacity - related costs to various customers. In FY 09 -10, the City's water service customers used approximately 3,205,000 hcf (-7,359 AF ) of water. About 59 percent the water was used by single family customers and about 41 percent by other customer classes. T.he. analysis of tiered water rates required detailed water use data for all customers subject fo the tiered rates. The detailed w ater use data is used to develop information on the distribution "of. water usage across the, range of use. Exhibit III -3 shows single family residential water use data on an annual basis using data from FY 09 -10. The bars making :up the bell- shaped curve indicate: the number (or percentage) of water bills using various amounts of water. The';line on each graph indicates the percentage of total water usage (using the right scale).that is at'orbelow, any given . level of usage. `For example, median monthly water usage for single family customers over the year is 7.5 ,hct Water usage of up to 7.5 hcf'accounts for about 65 percent of all water used by single family customers. This data and the information supporting these graphs are critical to tier rate design. With this information it is,pbssible to anticipate the amount of water sales, and therefore revenues, which will result from any tier structure. THE REED GROUP, INC. DRAFT — 10/27/2010 PAGE 33 CITY C)F PETALUMA WATER AND WASTEWATER FINANCIAL PLAN AND RATE STUDY 5% 5 10 15 20 25 30 35 40 45 Monthly Water Use (hcf ); 100% 90% m S 80% e o" 7t)% _ A a 60% a? V CU 50% 40% 30% a eo m 20% a, u ' N 10% 2' 0% 50 4% C 4 3% m 0 a; m 2% v d a 1% 0`Yo 0 'For reference purposes, median and average annual water use among single family customers is 7..5 hcf and 9 hcf monthly",, respectively. During winter months, when irrigation demands are minimal, single family water use is about 5.5 hcf. monthly. The foregoing customer.account =and: water use data have,• been used, in water rate analysis that is presented in the remainder of this section. Water Rate Calculations There are three steps to determining water rates. These are; Determine annual water rate revenue requirements ■ Analyze the,cosf <of providing service to each customer class ■ Design water rates to recover costs from each customer class.. Water Rate Revenue Requirements The 5 -year financial plan was used to identify the water rate revenue needs for.each 'fiscal year of the five =year planning period : However, as described water rates are adjusted on a . �_� calendar year basis. Water rate calculations presented herein, are based on the revenue. to be generated in 2011' and are revenue neutral with the water rates approved in 2007 to be. implemented in January 20'11. While -total annual water rate revenues for FY 10-11 and FY 1.1 -12 shown in the financial plan (see. Exhibit lk5) are about $11.28 million and $12.16 million, respectively, the revenue need forcalend'aryear 2011 is about.$1.1.61 million. This 'is the annual THE REED•GROUP, INC. DRAFT — 10/27/201 O PAGE 34 Exhibit 111 -3 Cityof Petaluma •- Deparimenvof Water Resources and Conservation .Summary- of5ingle- F6mily WaterUse Characteristics: water rate revenue requirement used for water rate calculation purposes for 2011. It should be noted that this revenue requirement is exclusive of any adjustment to water rates and revenue needs that may occur from changes in the' cost of wholesale water purchases. An adjustment to ' water ratesfor that purpose is.described laterin this section. Cost of Service Analysis Once the annual water rate revenue requirement has been determined, the next in the rate setting process is to evaluate the cost of providing service. Water rate calculations contained herein are-intended to generate the level of `revenue commensurate with the revenue requirement from the City's water service customers. The manner in which each customer is responsible for the water utility's costs is the subject of the cost of service analysis. The water utility incurs certain types of costs associated with making water service available to customers. Other costs are incurred as a direct result of customer -water usage. A cost of'service analysis is intended to allocate the costs of providing water service to customers in proportion to the extent to which, each customer causes the costs to be incurred'. ''There are many approaches to cost of service analysis; some are more complex than others. The, approach used herein is commensurate with the data available, the distinctions currently made between various types of customers, the - requirement to fairly and reasonably reflect differences in service provisions to differently situated customers. The cost allocation methodology used herein `begins by assigning, all costs to one of three categories. The cost allocation' process is performed with data available in the City's budget and accounting documents. The three categories include: Customer costs such as'meter reading and billing, are fixed costs that tend to vary as a function of the number of customers being served.. Customer costs are allocated to customers based on the number of accounts. That is, every customer will pay an equal ........ _ ... . share of customer - related costs. ■ Caoacity'.costs are also fixed costs; however, these tend to vary in relation to the capacity of the water system. Customers that place greater or lesser burdens on the capacity of the water system should bear greater�or lesser shares of these costs. The sizing of the water system is based on "the potential demand that each customer could place on the water system. Capacity costs are allocated to customers "based on the size. (hydraulic capacity) of the •water meter. The hydraulic capacity reflects the potential dernand'that a customer -could place on the water system at any given time. A customer with a Large Meter size will be assigned a large share of fixed 'capacity - related costs than one with a' smaller meter. Capacity costs include costs associated with the water'system's capacity including contributions to the capital program, debUservice, maintenance costs, etc. Commodity: costs are variable costs that vary with the amount of actual water use. Water purchases costs and energy costs are two primary examples. However, in an effort to encourage water conservation, fixed costs are frequently included in commodity components such that a'majority of costs are recovered on the basis of usage. Even though some commodity costs are fixed, rather than variable, it is reasonable to allocate these costs to customers on the basis of usage, rather than the capacity relationship expressed by meter size. ■ The water conservation best management practice for retail water rates (now BMP 1.4 and formerly BMP 11), as promulgated by the California Urban Water'Conservation Council, requires THE REED GROUP, INC. DRAFT— 10/27/M0 PAGE 35 CITY OF PETALUMA WATER AND WASTEWATER FINANCIAL PLAN.AND RATiE.STUDY that at least 70. percent of water rate revenue,be.;generated through usage charges. The City's current water rates generate about 87 percent of 'revenue from usage (commodity) 4charges, even though usage based revenue has declined 'commensurate to reduced water demands. In maintaining the City's policy objective.of;encouragin'g water conservation through the water'rate, the allocation of costs presented herein matches the current relationship withr'87 percent of the revenue requirement•allocated to the commodity component Based on the FY 10 -11 budget for the water utility, customer service costs represent about 4.5 percent of the annual, wateh rate revenue requirement;, ''This leaves 8.5 percent of the revenue requirement allocated to capacitycosts. In .summary, the -cost allocation resulted in, a di "sthbution of costs to customer, capacity, and commodity categories :at about-4.5. percent, 8.5 i percent, and 87 percent, respectively. Water Rate Design The third ;step in the rate setting' process :is the design of water rates to recover costs from each customer classand generate the.revenue needed for the utility. The.City's water'rates include both fixed servicecharges and, water usage rates. The,calculation of'each of these is described below: Service Charges Service charges are intended to recover the customer and capacity costs' identified through the cost of service analysis. Service charges apply to all customer water bills; regardless of the amount of water actually.,used. In,calculat'ing service chargescustorner costs are allocated equally to all customers and capacity costs are allocated' based meter size_ in: relation to the hydraulic capacity associated with the'various meter Exhibit 111-4 presents the calculation of service charges: for -the water`rates proposed for 2011. The Monthly servicercharge for a standard' 3/a` water meter would be $5.60., This is slightly lower than the planned, service charge for January 2011 ofl$5.69. .Other service charges ar&somehat higher than current service charges. The allocation reflects the fact: that a small portion of`water system costs are directly related to the number of customers served. A majority of fixed, costs are allocated' on, a capacity basis as, reflected .by the; meter size: T;he changes to the service charges across the range meter sizes better reflects the cost of`providing service to customers of varying meter sizes. At present this =capacity relationship is not fully expressed in the service charges. Water Usage Rates Upon review of'the City's current tier structure,4 is recommended that the City maintain the current 4- tier."structures for single family customers. Under the "proposed water rates, the monthly single .family ,water usage allocationswithin ea.ch'tier would remain as follows: Current' Proposed Tier Allocations Tier Allocations Tier 1 0 -9. hcf /mo.. 0 =8 hcf /mo.. Tier 2 10 -1:8 hcf /mo. 9-16 hcfLmo. Tier3 19 724 hcf /mo. 17 -24 hcf /mo.. Tier >24 hcf /mo. >24 hcf /mo. THE REED GROUP, INC. ^ DRAFT — 10127/2010 PAGE 36 WATER AND`WASTEWATER FINANCIAL PLAN AND RATE S TUDY Exhibit 1114 Notes: (1) Revenue neutral:relative to the, previously approved` waterratesfor 2011. (2) Number of;active.customer accountsas of August 2010, from the utility billing system. (3) Annual revenue requirement forCY 2011 derived from the financial plan model presented in Section It. (4) Actual annual water use in hcf•for FY 09 -10 from utility billing system. The'revi'sed tier allocations for single family customers are recommended for the following reasons. • ■ The first teraIIlocation of up'to 8 hcf per month (about . 0 gpd) is a slight reduction in the current first ; tier allocation. The, first tier is intended to represent indoor water need and is generally determined.' by examining the winter water use characteristics of customers. Based on FY 09 -10 water usage about 80'percent-of all single family customers use 8 hcf or less per month during winter months. Reducing the tier allocation also makes ii possible to slightly reduce the amount of the first tier rate (and still remain revenue neutral). On an annual basis approximately 57 percent of all single family residential water bills will only have first tier water usage, even with the reduction in the tier allocation. Also, more than two- thirds °of the single family Vater usage is within the first tier. ■ The second tier allocation.ofup to 16 hcf per month (about 400 gpd) is1ntended to provide a reasonable amount of water for outdoor irrigation purposes. With this tier allocation about 72 percent of single family customer bills would remain within the first two tiers' of the rate structure during peak summer irrigation months. On an, annual basis about 88 percent of the single family water bills would be within the first two tiers and about 90 percent of all single family water usage would be within the first two tiers. The third tier with water usage up to 24 hcf per month (about 600 gpd) is an indicator to customers that their water use is beyond'the range of typical water use, even during peak summer months. ■ The fourth tier includes all water usage in excess of 24 hcf per month (over 600 gpd) and represents excessive usage. With this tier allocation about 9 percent of single family customer bills would have some usage at this highest tier during peak summer irrigation months. On an annual basis about 3.5 percent of the single family water bills would be in THE REED GROUP, INC. DRAFT — 10/27/2010 PAGE 37 City of Petaluma — Department OT vraWr n o -- Sum mar of Water Rate Calculations for 2011 1 No. of Connectionsby Meter Size (2) Total U to 314" 1" 1 172" 2'' g•• 4" 6" Accounts No of Connections . 16;369 2,052 312 464 2 55 550 24 400 10 333 19,286 24,591 No. of Equiv:, Meters 16;369 3,427 1 Monthly Servim. Charge 226 $ 2.26. $ 2:26 $ 2:26 $ 2,2$ $ 2:26 '$ 2:26 Custom er Costs " s t $ $ 3.35 $ 5:59 $ 11.14 $ 17.83 $ 33.45 $ 55.76 $ 111.49 Capaci o S' .60 $ 7.84 $ 13.40 $ 20.09 $ 35.71 $ 58.02 $ 1 55 Service Charge $ $ 193:157 $ 50,158 $ 111,845 $ 23,568 $ 16,710 $ 6 133 650 `$ 1,510.000 Annual Revenue $ 1,100;603 Bi-Monthly Wtr. Use Rate Annual Annual Revenue Requirement.(3) Water Usage Charges Use Ran e h 4 $ /hc ` Revenue Sngl. Fam. Tier 1 0-16 hcf 1,287;979 $ 2.87 $ 3,695,000 Customer Costs $ 522.585 4.5% Tier 2 17 -32 hcf 33 hcf 412 117,507 $ $ 3.30 4.12 $ 1;361;000 $ 485,000 Capacity Costs $ 987,1,05 8:5% Tier 3 Tier -48 >48 hcf 78 $ 5.57 $ 436 Commodity Costs $ 10 87.00°i Use 1,309.321 $ 3.15 $ 4,127.000 Other Classes All Totals 3,205530 $ 3.15 $ 10,104.000 Total Revenue Rqmt. $ 11.613;000 Notes: (1) Revenue neutral:relative to the, previously approved` waterratesfor 2011. (2) Number of;active.customer accountsas of August 2010, from the utility billing system. (3) Annual revenue requirement forCY 2011 derived from the financial plan model presented in Section It. (4) Actual annual water use in hcf•for FY 09 -10 from utility billing system. The'revi'sed tier allocations for single family customers are recommended for the following reasons. • ■ The first teraIIlocation of up'to 8 hcf per month (about . 0 gpd) is a slight reduction in the current first ; tier allocation. The, first tier is intended to represent indoor water need and is generally determined.' by examining the winter water use characteristics of customers. Based on FY 09 -10 water usage about 80'percent-of all single family customers use 8 hcf or less per month during winter months. Reducing the tier allocation also makes ii possible to slightly reduce the amount of the first tier rate (and still remain revenue neutral). On an annual basis approximately 57 percent of all single family residential water bills will only have first tier water usage, even with the reduction in the tier allocation. Also, more than two- thirds °of the single family Vater usage is within the first tier. ■ The second tier allocation.ofup to 16 hcf per month (about 400 gpd) is1ntended to provide a reasonable amount of water for outdoor irrigation purposes. With this tier allocation about 72 percent of single family customer bills would remain within the first two tiers' of the rate structure during peak summer irrigation months. On an, annual basis about 88 percent of the single family water bills would be within the first two tiers and about 90 percent of all single family water usage would be within the first two tiers. The third tier with water usage up to 24 hcf per month (about 600 gpd) is an indicator to customers that their water use is beyond'the range of typical water use, even during peak summer months. ■ The fourth tier includes all water usage in excess of 24 hcf per month (over 600 gpd) and represents excessive usage. With this tier allocation about 9 percent of single family customer bills would have some usage at this highest tier during peak summer irrigation months. On an annual basis about 3.5 percent of the single family water bills would be in THE REED GROUP, INC. DRAFT — 10/27/2010 PAGE 37 i WATER AND WASTEWATER CnY OF PETALUMA FINANCIAL PLAN.AND RATE STUDY the highest tier and about 4 percent of all; single family water usage would be in this highest tier. Just as important as the tier allocations is the setting ofaier` rates To maintain equity across the customer classes, each customer class within the City has the same effective uniform water usage rate. For .multi- family,'commercial, institutional industrial, and irrigation customers within the City it is recommended that the uniform water usage rate be adjusted to $3.15 /hcf from the previously approved usage rate of'$3.14 /hcf for 2011. Tiered rates -for single family customers:,have been designed such that the weighted average water usage rate across all tiers isequal toAhe uniform water usage rate for otherAcustomers. Tosachieve this, the rate for the' first tier is lower than the uniform rate and the rates for the second, thrd,:and four tiers are all higher than the uniform rate. It.is recommended that the step from the first to second tier ,remain at, a 15 percent, increase in the rate. The first and second tiers 'combined represent most single family (indoor and outdoor) water usage. Step increases from:fhesecond to third,'and.third to fourth tiersar&steeper., That is,ithe amountof rate increase increases W'ifh each tier. ItJs recommended that the rate step to the third tier be a 25 percent step increases and the. step to the fourth "tier be a 35 percent increase, thus' providing increasingly.:stronger water conservation signals. The - overall weighted average cost" per unit of, single family water usage, ;across all four tiers, is $115 per hcf. Therefore, the tier stnacture'i"s'in balance with the uniform rate paid by other customer classes. The City can justify the tier structure .for° single family residential, customers, on a cost basis by reasonably allocating a portion of water conservation costs to peak usage rates. The additional revenue�generated in the third and fourth tiers (ab "ove the second tier).represents about 75 percent of the' water conservation, program costs allocated to- single family customers. The remaining 25 percent of water cons' servation costsis reflected in base (firsttwo tiers) water usage. ExhibitAII -5 presents tiered Water usage rate calculations for single family residential customers. Exhibit III-6 presents graphically the 'changes to the single family °tier structure. The lower right corner of Exhibit III- 41presents Water usage rates for each customer class and associated revenue calculations. Exhibit II1-5 City of Petaluma—, I Department of 'Water Resources and Conservation Sumacy of Single. Family Tiered Water Rate,Calculation Weighted Average Rate - -> $ 115 water use allocations. L F _ j'. LJ THE REED GROUP, INC. DRAFT- 10/27/2010 PAGE38 Brk.. Pt °(1) % Bills _ . %a Use . Rate ($ /tg) Rate Step Proposed Residential Wafer Rafe Structure Tier 1 8 57.3 %0 67.9 % $ 2 -87 'Tier 2 16 30'.9% 21:8% $ 3:30 15% Tier,.3 24 83% 62% $ 4:12 25% Tier'4 3.5% 4.1% $ 5:57 35% Weighted Average Rate - -> $ 115 water use allocations. L F _ j'. LJ THE REED GROUP, INC. DRAFT- 10/27/2010 PAGE38 FINANCIAL AL WATER PLAN AND RATE CITY'OF:PETALUMA ATE STUDY Exhibit 1114 City of Petaluma— Department of Water Resources and Conservation Proposed Single Family Tiered Water Rate Structure (201.1) $6.00 $5.00 $4.00 'u t $3.00 a f= $2.00 $1.00 1 2 3' 4 5 6 7 8 9 10 11 12 13 14 15 16 17.18 19 20 21 22 23 24 , 25 26 27 28 29 30 Monthly Water Use (hd) Proposed !!later Rate Schedule for 2011 Exhibit III -7 summarizes current and proposed water rate schedules. The proposed water rates are revenue neutral relative to the water rate schedule previously adopted for 2011. Impact of - 'Proposed Rates on Representative. Customer Bills Exhibit III-8 summarizes the impact of the proposed water rates relative, to the water rates approved in 2007 for 2011. Any rate structure charige will result in changes in customer bills, even when applied in .a revenue neutral situation (as is. proposed here). The specific impact to any individual customer will depend on,the customer class, _meter size, and actual water usage. Most water bills will be ;somewhat lower under the proposed. rates, while others will b,e 'higher. In all cases, the bills under the proposed water rates are intended to better reflect equity across customers', the.costof providing service, and the City's goalsfor encouraging water conservation. THE REED GROUP, INC. Current Tier Rates Proposed Tier Rates DRAFT — 10/27/2010 PAGE 39 WATER AND WASTEWATER CITY OF PETALUMA FI NAN C IAL PLAN AND RATE S T U DY Exhibit 111 -7 City of-Petaluma - D,epart;ment of" Water 'Re.sources.and,Conservation Previously Approved and Proposed Wafer;,Rates (1 Notes, Jan. 2010 Effective I January 1 each year. Jan. 20 • Proposed Structure 2 .Monthly Service Charges water rates for January 2011. (3) Monthly tier allocations: Current Proposed Up to 3%4" meter $ 5.42 $ 5.69 $ 5.60 1" meter (resid.) $ 6.51 $ 6.84 $ 7.84 1" meter $ 6.73 $ 7:07 $ 7.84 1 112" meter $ 1`1:81. $ 12.40 $ 13.40 2" meter $ 18.54 $ 19.46, $ 20.09 3" meter $ 38.27 $ 40.19 $ 35.71 4" meter $ 51.55 $ 54.13 $ 58.02 6" meter $ 74.47 $ 78191 $ 113.75 Water Usage Charge ($ %hcf) Single Family (3) Tier 1 $ 2.83 $ 2.94 $ 2.87 Tier 2 $ 3.25 $ 341 $ 3.30 Ter 3 $ 4.07 $ 4.35 $ 4.1.2 Ter 4 $ 4.50 $ 4.82 $ 5.57 Other Customers (4) Al 1I water usage $ 2.96 $ 3.14' $ 3.15 Notes, (1) Effective I January 1 each year. (2) Proposed rate restructuring is revenue neutral with the previously approved water rates for January 2011. (3) Monthly tier allocations: Current Proposed Tier 1 0 -9 hcf /mo. 0 -8 hcf /mo. Tier 2 10 -18 hcf /mo. 9 -16 hcf /mo. Tier '3 19 -24 hcf /rno. 17 -24 hcf /mo. Tier 4 >24 hcf /mo. >24 hcf /mo. (4) Includes, multi - family, commercial, institutional, industrial, and irrigation accounts. Excludes recycled accounts. THE REED GROUP, INC. DRAFT - .10/2712010 PAGE 40