DEPARTMENT OF UTILITIES RATE DEVELOPMENT PLANNING UPDATE Utility Rate Advisory Commission – July 23, 2014

Presentation Overview  Rate Development Process  Report Backs  Budget Updates (FY14 and FY15)  Rate Structure Study

3 Step Rate Development Process STEP 1  Budget to Actual  O&M  Rate structure STEP 2  Ongoing O&M  New program needs  Capital needs  Environmental considerations STEP 3  Capital funding strategy  Scenario runs  Rate “smoothing”

Financial Plan  Established financial policies  Established a near-term rate plan that considers long-term implications  Considered available financing mechanisms – cash versus debt – for capital funding  Minimized rate impact while meeting immediate capital and regulatory needs  Developed a “smoothed” rate plan with phased- in needs

Capital Planning  30-Year Infrastructure Investment Program  Best Practices replacement cycle  Regulatory compliance  Sustainable financing  5-year Capital Improvement Program  Identify specific projects based on criticality and condition  Near-term Funding Plan  Accountability, Maintain flexibility, Secure credit

Rate Structure Review  The utility rate structure is the way we allocate the cost of service among our customers for services, not how much the cost of service is.  A utility typically evaluates its utility rate structures periodically to ensure:  Fair and equitable  Consistent with industry best management practices  Provide conservation and environmental sustainability incentives  Adequately recover the revenue sufficient to meet the regulatory, operational, and financial responsibilities  Proposition 218 compliant

Rate Structure Alternatives  RFC hired in December 2013 to evaluate the City’s current rate structures and make recommendations for alternative structures where appropriate  Consultant Proposed Rate Structures  DOU staff added additional elements to evaluate

Revenue Requirements/Demands  Regulatory  Rehabilitation & Replacement  Transition from Flat to Metered Water Accounts  Sustainability  Security  Statewide Water Issues  Drought

Rate Development and the URAC  City Code Section outlines the URAC roles and responsibilities  Utility Fund workshops  Collaboration, review and comment on rate proposals  Hold Public Hearing for rate adjustment proposal  Provide Rate Recommendation to City Council  Partner in community education/outreach

30/5/3 Plan  30-Year Infrastructure Investment Program  Best Practices replacement cycle  Regulatory compliance  Sustainable financing  5-year Capital Improvement Program  Identify specific projects based on criticality and condition  3-year Funding Plan  Accountability, Maintain flexibility, Secure credit  Community Engagement

FY Rate Adjustments  30/5/3  Water – 10% per year  Wastewater 16%, 15% 14%  Community Engagement

FY Water and Wastewater Capital Financing Plan Water FY2013FY2014FY2015 Bond$239,500,000 PayGo$7,000,000$4,000,000$10,000,000 TOTAL$246,500,000$4,000,000$10,000,000 Wastewater FY2013FY2014FY2015 Bond$30,000,000 PayGo$1,500,000$500,000$1,200,000 Grant$6,200,000 TOTAL$37,700,000$500,000$1,200,000

Bond Funded Water CIP Mandated Water Meter Retrofit and Pipeline Replacement $65.5 million Well Rehabilitation $6.3 million Water Treatment Plants Rehabilitation Project $161 million Other $6.7 million Total: $239.5 million

Bond Funded Wastewater CIP SSS Permit/Consent Decree Compliance $8.5 million Pump Station/Large Facility Rehabilitation $3.7 million CSS Permit Compliance $12.0 million Other $3.2 million Total: $30 million CSS Rehabilitation $2.6 million

Community Engagement  “Your Utilities. Your Voice.”  Education about the City’s capital and regulatory challenges Community meetings Websites and social networking sites  Input and feedback on fiscal strategy and rate setting priorities Surveys Community workshops

Next Steps  Complete Rate Structure Review  Developing Revenue Requirements  Evaluating Rate Adjustment Alternatives  Community Engagement  Developing Proposals with CMO, URAC and Council

FINANCE REPORT BACKS & BUDGET UPDATES Utility Rate Advisory Commission – July 23, 2014

FY 2014 Beginning Fund Balances (in Thousands) Fund Available Fund Balance at 6/30/2012 Available Fund Balance at 6/30/13 Water Fund (6005)$14,483$27,557 Wastewater Fund (Fund 6006) $ 8,587$10,840 Storm Drainage Fund (6011) $17,323$15,245

CIP Pay- Go Amounts Pay-Go Funded CIP Appropriations FY 2012 – FY 2014 FundFY 2012FY 2013 FY 2014 Water Fund (6005) $13,612,000$7,000,000$4,000,000 Wastewater Fund (6006) $ 1,775,000$1,500,000$ 400,000 Storm Drainage Fund (6011) $ 3,848,000$2,355,000$2,655,000

Debt Obligations Fund Debt Outstanding June 30, 2013 (in thousands) Projected Debt Service FY 2015 (in thousands) Projected Debt Service Coverage Ratios Water Fund$410,422$27, x Wastewater Fund$ 38,568 $ 2, x Storm Drainage Fund $ 25,989$ 3, x Total$474,979$33,121

Budget Updates  FY 2014 Budget to Actual Updates  Water and Wastewater Revenues projected to come in higher than projections shared in April 2014  Only material expenditure change from prior projections is in Transfers  FY 2015 Approved Budget  Approved budget for Utilities is the same as the proposed FY 2015 budget presented previously

Purpose of Stakeholder Participation  Address opportunities, challenges and goals of the following utility rate structures: Water Wastewater Stormwater  Outcome offers valuable stakeholder input to help guide the rate restructuring process

Study Team Members & Roles  City of Sacramento Department of Utilities Analyzing rate structures using a community-based outreach process  Raftelis Financial Consultants, Inc. Rate consulting firm  Crocker & Crocker Recruits stakeholder participants, facilitates process and drafts final outcome report

 Educate stakeholders on current structures and rates  Discuss advantages and disadvantages Current rate structures Potential alternative rate structures  Develop outcome report to provide to staff and Utility Rate Advisory Commission Process

Participating Organizations  City of Sacramento residents  Business and large customers Dr Pepper Snapple Group Sacramento Metro Chamber of Commerce Sacramento City Unified School District Sacramento State University  Multicultural organizations Crossings TV Hmong Women’s Heritage Association Greater Sacramento Vietnamese American Chamber Asian Pacific Rim Foundation Organization for Chinese American Advocates Council of Asian Pacific Islanders Together for Advocacy and Leadership  Service and community groups Sierra Curtis Neighborhood Association  Environmental groups California Native Plants Association Environmental Council of Sacramento Save the American River Association  Utility Rate Advisory Commission

Overall Themes  Equity  Conservation  Water quality  Simplicity  Administrative challenges  Political capital  Economic development  Accuracy

Stakeholder Input: Water  Reviewed five potential structures  Key takeaways Group shared overwhelming support for avoiding a changed flat rate structure between now and 2025; disadvantages outweighed advantages Structures must have a significant “pain” threshold to impact any conservation or reduced use

Stakeholder Input: Wastewater  Reviewed six potential structures  Key takeaways Group concerned with communicating difference between City’s structure and Regional San/SASD’s Group commented on benefits of structures that show a connection that ratepayers pay for what they use while ensuring enough fixed income for utility operational needs

Stakeholder Input: Storm Drainage  Reviewed four potential structures  Key takeaways Group concerned that there will not be enough incentive for commercial ratepayers or equality between residential and commercial charges Rate calculations based on impervious areas may be confusing for ratepayers Group strongly supports revenue and rate stability for city and ratepayers

Questions?

THANK YOU Utility Rate Advisory Commission – July 23, 2014