City of Sisters, OR 2017 Water & Sewer Rate Study Presented By: Chris Gonzalez, Project Manager October 18, 2017

Overview Introduction to Ratemaking Revenue Requirement Analysis: Role of Utility Rate Studies Overview of Rate Study Process Revenue Requirement Analysis: Policy Framework Assumptions Findings Sample Bill Forecast/Comparison Questions/Discussion

Role of Utility Rate Studies Rate studies are important because they: Enable a utility to remain self-sufficient Quantify operating and capital needs Set rates to cover needs Account for changing conditions Declining water sales Economic cycles Ensure rates reflect utility policies and priorities Equitable cost recovery from customers Revenue stability and financial sustainability Affordability

Overview of Utility Rate Study Process Revenue Requirement Cost-of-Service Analysis Design Rates Establish Fiscal Policies Forecast Costs & Revenues Fixed Charges Volume Costs by Function Costs by Customer Class Not part of this study

Utility Fiscal Policies Fiscal policies help guide the financial management of the utilities Common fiscal policy topics for utilities Reserve structure / levels System reinvestment funding Financial performance standards

Fiscal Policies: Reserves Intended to protect the utility from unforeseen financial impacts This analysis assumes the following reserve structure: Low sales year(s) Regulatory changes Economic cycles Changes in contract costs (e.g. plant operations) Reserve Purpose Minimum Balance Operating Reserve Accommodate difference in revenue/expense cycles 2 months (17%) of operating expenses Based on 2018 Budget, $85,000 for water and $92,000 for sewer Capital Improvement Reserve Accrue funding for capital improvements (excluding SDC-eligible projects) No explicit minimum balance (above $0) Funded by policy-based annual transfers Capital Replacement Reserve Accumulate funds for replacement of equipment and vehicles System Development Charge (SDC) Fund Segregate SDC revenue to ensure that it is used only for SDC-eligible costs

Fiscal Policies: System Reinvestment Is an important part of long-term asset management Involves generating cash above current operating costs and debt requirements City policy provides for capital funding from water and wastewater rates: Basis for Annual Transfers Annual Transfers Capital Improvement Reserve Projected average annual capital project expenditures (excluding SDC-eligible projects) Water: $104,094 Sewer: $142,000 (2018), $128,000 (2019) Capital Replacement Reserve Allocated replacement cost of equipment/vehicles, amortized over the assets’ expected lives Water: $45,219 Sewer: $46,026

Fiscal Policies: Financial Performance Defines “revenue sufficiency” based on: Cash flow needs Coverage requirements Net revenue ≥ multiple of annual revenue bond debt service (per bond covenants) Not currently applicable to the City’s water and wastewater utilities “Revenue requirement” is the amount needed to satisfy both tests Cash flow may be negative temporarily to phase in rate increases Relies on existing fund balances to absorb cash flow deficits Coverage requirement (if applicable) must always be met Analysis considers a multi-year period Goal is to promote a long-term strategy of stable, moderate increases Operation and maintenance Debt service (bonds and loans) Reserve funding Rate funding for capital

Key Assumptions Cost Inflation Annual Growth Rates General: 1.8% per year Labor Costs: 2.6% per year Benefits (PERS): 25.0% every two years Annual Growth Rates Average: ≈ 2.7% per year ≈ 43 new water customers ≈ 40 new sewer customers Rate-Funded System Reinvestment Policy-based transfers to the Capital Improvement/Replacement Reserves Water: $149,313 per year Sewer: $46,026 per year Operating Forecast Generally based on 2018 Budget; escalated Transfers to City Hall Fund based on established loan payment schedule Franchise fees calculated on projected revenues

Capital Needs Forecast – Water $995,420 in capital projects from 2018 – 2022 Cash resources are expected to provide enough cash funding to cover the utility’s projected capital costs without any additional debt Supply Improvements: $460,120 Distribution Improvements: $354,500 Equipment/Vehicle Replacements: $110,800 Other: $70,000

Water Revenue Requirement Forecast Proposed Projected 2017-18 2018-19 2019-20 2020-21 2021-22 Annual Rate Revenue Adjustment 2.0% Rate Increase Drivers % of 5-Year Rate Increase Funding capital (system reinvestment) through rates 83% Correcting existing deficit and keeping up with rising operating costs 17%

Recommended Water Rates Existing Proposed Projected 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Monthly Base Rate 5/8” × 3/4” Meter $20.59 $15.50 $16.05 $16.77 $17.36 $18.02 1” & 1-1/2” Meter $23.09 $17.38 $18.00 $18.80 $19.47 $20.21 2” Meter $25.58 $19.25 $19.95 $20.83 $21.57 $22.39 3” or Larger Meters $62.40 $46.96 $48.65 $50.82 $52.62 $54.61 Volume Rate Over Allotment $1.00 Monthly Volume Allotment 1,000 cf 0 cf Monthly Residential Bill @ 700 cf $22.50 $23.05 $23.77 $24.36 $25.02 Change From Prior Year +$1.91 +$0.56 +$0.71 +$0.59 +$0.66 Recommended rate structure removes allotment built into base rate Corresponding reduction in base rate Customers pay for all water usage

Capital Needs Forecast – Sewer $1,836,800 in capital projects from 2018 – 2022 Cash resources are expected to provide enough cash funding to cover the utility’s projected capital costs without additional debt Treatment Plant Improvements: $595,000 Conveyance Improvements: $626,000 Effluent/Disposal Improvements: $580,000 Equipment/Vehicle Replacements: $35,800

Sewer Revenue Requirement Forecast Proposed Projected 2017-18 2018-19 2019-20 2020-21 2021-22 Annual Rate Adjustment 2.0% Rate Increase Drivers % of 5-Year Rate Increase Funding capital and related reserves 100%

Recommended Sewer Rates Existing Proposed Projected 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Monthly Rate per EDU $39.00 $37.77 $38.50 $39.25 $40.01 $40.78 Change From Prior Year -$1.23 +$0.73 +$0.75 +$0.76 +$0.77 Equivalent dwelling units (EDUs) assigned to customers based on class: Residential: 1 EDU per dwelling unit Commercial: 1 EDU per 501.337 cubic feet per month of “winter-average” water use Existing structure defines winter period as January – March Issue: January – March not a representative demand period for some customers Proposed structure changes winter period to October – April Customers with high irrigation in October and April assumed to reduce usage Increases calculated commercial EDUs by 14% (≈ 100 EDUs) Decreases residential bills by $1.23 per EDU (≈ 3%) relative to existing rates

Water/Sewer Bill Impacts Under Proposed Rates Under the proposed structure, 742 customers (≈ 54%) would see an increase of up to $227.41 in their average monthly water/sewer bill. Under the proposed structure, 623 customers (≈ 46%) would see a decrease of up to $184.24 in their average monthly water/sewer bill.

Combined Residential Utility Bill Forecast Single-Family Residence (3/4” meter, 700 cf of water use per month) Monthly Residential Bill Forecast (Recommended Rates) Existing Proposed Projected 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Water Bill @ 700 cf $20.59 $22.50 $23.05 $23.77 $24.36 $25.02 Sewer Bill 39.00 37.77 38.50 39.25 40.01 40.78 Total $59.59 $60.27 $61.55 $63.02 $64.37 $65.80 Change From Prior Year +$0.68 +$1.28 +$1.47 +$1.35 +$1.43 % Change From Prior Year +1.1% +2.1% +2.4% +2.2%

Monthly Single-Family Bill Comparison Assumptions: 5/8” Meter Water Use: 7 ccf

Questions / Discussion

Chris Gonzalez (425) 867-1802 www.fcsgroup.com Project Manager chrisg@fcsgroup.com Contact FCS GROUP: (425) 867-1802 www.fcsgroup.com