Water & Sewer Rate Study Presented by: Chris Gonzalez, Project Manager July 11, 2018

Agenda Overview of Key Questions Overview of Project Scope Review of Preliminary Revenue Requirement Analysis Overview of Other Study Elements Cost-of-Service Rate Design System Participation Fees (SPFs) Questions/Discussion

Key Questions What rate adjustments are needed to cover each utility’s costs? Do the City’s rates recover costs equitably from the City’s customers? Among customer classes (e.g. single-family, multi-family, commercial)? Among service areas (Winslow, Rockaway Beach/South Island) Are the City’s rate structures a good fit, given current priorities? What is development’s fair share of costs?

Overview of Project Scope Financial Policies O&M Capital Debt Rate Revenue Other Revenue Flow Strength (BOD/SS) Customer Service Cost-of-Service Analysis Rate Design Base Capacity Peak Capacity Fire Protection Total Revenue Required Revenue Requirement 4 6 5 Fixed Charges Variable Charges Wastewater Water Commercial Single-Family Functional Allocation Customer Class Allocation Initial Project Meeting 1 Data Collection 2 START SPF Analysis 3 Existing Asset Costs Future Project Costs Customer Base (Equivalent Units) SPF per Equivalent Unit Multi-Family Documentation 7 Workshops, Meetings, & Public Hearings 8 FINISH Kickoff Meeting Data Request Follow-Up Data Review Utility Advisory Committee Public Hearing Council Study Session Draft Report Final Report   Preliminary Draft

Revenue Requirement Analysis How much revenue should rates generate?

Revenue Requirement Analysis Defines “cost-based rates” as rates based on aggregate obligations Operating costs Capital project expenditures Debt service payments Other financial needs Establishes a multi-year financial plan beyond the current budget cycle Key Elements of Revenue Requirement Analysis: Defining revenues and expenses Developing capital funding strategy Establishing fiscal policy “framework”

Defining Revenues & Expenses Operating revenues/expenses are generally based on the City’s Budget Often adjusted for inflation for future-year projections Issues to consider in developing revenue/expense projections: Revenue planning based on “normal-year” sales Prior-year actuals + growth vs. budgeted amounts? Accounting for abnormally high/low sales years Accounting for trends in water usage Accounting for recurring vs. one-time expenses Changes in contract/commodity costs (e.g. Kitsap County Sewer District #7) Anticipated operational changes (e.g. staff additions)

Utility Fiscal Policies Fiscal Policy Purpose Target Policy Water (2018) Sewer (2018) Operating Reserve Liquidity cushion to accommodate fluctuations in cash flow 60 Days of Operating Expenses $225,000 $454,000 Capital Reserve To address emergency repairs and unanticipated capital repairs 1% of the cost of system assets $132,000 $363,000 System Reinvestment Promote ongoing system integrity through investment in the system Annual depreciation expense $275,000 $924,000 Debt Service Coverage Compliance with debt covenants, preserving credit rating for future debt issuance (N/A – City utilities do not have any debt requiring coverage)

Key Assumptions Annual Cost Inflation Operating Forecast Salaries: 2.0% Benefits: 4.0% Other Operating Costs: 2.0% Construction Costs: 3.0% Operating Forecast Generally based on 2018 Budget Adjusted for inflation in future years Adjusted to account for one-time expenses Annual Growth Rates Based on experience since 2013 Winslow Residential: 1.7 – 1.8% per year Winslow Commercial: 0.4% per year Winslow Irrigation: 4.6% per year Rockaway Beach: 0.3% per year Aggregate Growth Assumptions Winslow: 45 accounts per year Rockaway Beach: <1 account per year

Capital Needs Forecast – Water $7,204,000 in capital projects from 2018 – 2024 Cash resources are expected to cover projected capital costs Storage Tank: $3,562,000 Mains: $2,413,000 Supply/Treatment: $489,000 Meters: $309,000 Other: $431,000

Water Revenue Requirement Forecast Existing Proposed Projected 2018 2019 2020 2021 2022 2023 2024 Annual Rate Adjustment 3.00% Single-Family Bill @ 7 ccf/Month $19.74 $20.33 $20.94 $21.57 $22.22 $22.88 $23.57 Change From Prior Year +$0.59 +$0.61 +$0.63 +$0.65 +$0.67 +$0.69 Rate increases are needed to phase in proposed system reinvestment policy Fund 30% of depreciation in 2019; increases to 55% by 2024

Capital Needs Forecast – Sewer $10,875,000 in capital projects from 2018 – 2024 Cash resources are expected to cover projected capital costs Pump Stations: $7,974,000 WWTP Outfall: $1,306,000 Gravity Mains: $747,000 Fleet: $848,000

Sewer Revenue Requirement Forecast Existing Proposed Projected 2018 2019 2020 2021 2022 2023 2024 Annual Rate Adjustment 3.00% Single-Family Bill @ 7 ccf/Month $93.65 $96.46 $99.35 $102.33 $105.40 $108.57 $111.00 Change From Prior Year +$2.81 +$2.89 +$2.98 +$3.07 +$3.17 +$2.43 Rate increases are needed to generate funding for capital and phase in system reinvestment Fund 35% of depreciation in 2019; increases to 95% by 2024

Sample Monthly Bill – 3/4” Single-Family @ 7 ccf

Key Policy Questions: Revenue Requirements What level of rate-funded system reinvestment is appropriate? Closely related to cash vs. debt funding policy/preferences Need to consider generational equity and near-term impacts How should the City adjust its utility rates? Moderate annual increases Larger, more periodic adjustments

Cost-of-Service Analysis How much should each customer class pay?

What is a “Cost-of-Service” Analysis? An equitable distribution of costs that considers: Measures of usage and demand Planning, engineering, and design criteria Facility requirements A cost-of-service analysis determines: Cost of providing service by function Equitable share of costs for each customer class

Cost-of-Service Analysis Methodology Revenue Requirement Step #1: Allocate Costs to Functions of Service Customer Meters & Services Base Capacity Peak Capacity Fire Protection Step #2: Allocate Costs Among Customer Classes Residential Multi-Family Commercial Irrigation

Key Policy Questions: Cost-of-Service Analysis How should costs be allocated to fire protection? Which customer classes should be used for rates? Should be based on distinctions in demand / service needs Goal is equity, within the capabilities of the billing system Should cost shifts be phased in over time? Mitigate impacts to individual customer classes Facilitate logical progression of rates over time Allows monitoring of demand trends to inform ratemaking Water service needs incremental to fire flow needs Fire flow needs incremental to water service needs Proportionate allocation of needs

Rate Structure Analysis How should rates be set to meet the utility’s objectives?

Rate Structure Analysis Goal: Set rates for each class to recover assigned share of costs Base charges May increase with meter size and/or dwelling units Independent of water use Consumption charges Dependent on water use Generally requires customer data Customer counts by meter size Billable water usage by account, by billing period

Current Water Rate Structure Monthly Water Rates Winslow Rockaway Beach Residential Commercial Other Irrigation Base Rate Per Multi-Family Dwelling Unit $5.37 Up to 3/4” $10.77 $16.45 $24.04 $4.73 $11.64 1” $21.24 $36.40 $55.37 $6.22 $22.94 1-1/2” $38.72 $69.78 $107.58 $8.70 $41.85 2” $59.71 $109.52 $170.23 $11.70 $64.53 3” $115.70 $215.89 $337.28 $19.64 4” $178.65 $335.55 $525.22 $28.59 6” $353.94 $667.94 $1,047.31 $53.47 Consumption Charge per ccf $3.89 First 5 ccf (0 – 5 ccf) $1.09 $1.18 Next 7 ccf (6 – 12 ccf) $1.76 $1.90 Next 18 ccf (13 – 30 ccf) $2.49 $2.69 Over 30 ccf $3.39 $3.66 Water Billed from Nov – Apr $1.43 Water Billed from May – Oct $1.65

Current Sewer Rate Structure Monthly Sewer Rates Single-Family Multi-Family Commercial/ Mixed Use Senior/ Low-Income Users of Both Water and Sewer Base Rate per Unit $42.69 $37.39 $123.69 $21.35 Consumption Charge per ccf of Water Use1 $7.28 $3.65 Sewer-Only Customers Served by Winslow WWTP Base Rate per Equivalent Residential Unit $119.80 $129.43 $59.90 Customers Served by Kitsap County SD #72 Properties with Grinder Pumps $23.59 Properties without Grinder Pumps $19.42 1From mid-June through mid-September, single-family and multi-family users are billed for their average water usage from mid-December through mid-May. 2South Island sewer customers are also subject to a monthly rate assessed by KCSD #7, currently $56.65 per equivalent residential unit.

Rate Policy Objectives A sound water rate structure balances a variety of objectives1: It is prudent to review rate-setting goals and objectives periodically The revenue requirement and COS analyses help ensure that rates: Are cost-based and legally defensible Generate sufficient revenue Equitably recover costs from customer classes The rate structure analysis focuses on the other objectives Revenue/Rate-Related Cost-Related Practical-Related Revenue Sufficiency Consistency with Costs Legal Defensibility Revenue Stability Conservation & Efficiency Simplicity Philosophical Continuity Fairness & Equity Feasibility Affordability 1Per Bonbright, Danielsen, and Kamerschen in Principles of Public Utility Rates

Key Rate Structure Policy Objectives Definition Revenue Stability Control and predict revenue, regardless of external factors Conservation & Efficiency Encourage efficient water use Affordability Provide affordable water to “lifeline” users Understandability Keep structure simple to administer and explain to customers It is important to have a clear / consistent understanding of: The definition of each objective How the various objectives differ from each other Most rate structures reflect a balancing of these objectives, some of which conflict with each other

Weighing These Objectives Pair-wise Comparison: Compare two objectives at a time Assign subjective weighting “points” to each objective Evaluate relative priority of objectives Our Version: For each comparison, assign 1 – 5 points to each objective The number of points assigned to both objectives should add up to 6 Relative ranking of alternatives is determined by adding up all points 1 2 3 4 5 Much Less Less Equally More Much More Important

Sample Pairwise Comparison 5 Revenue Stability vs. Conservation & Efficiency 1 4 Affordability 2 Understandability 3 Objective Total Score Ranking Revenue Stability 5 + 4 + 2 = 11 2 Conservation & Efficiency 1 + 1 + 1 = 3 4 Affordability 2 + 5 + 3 = 10 3 Understandability 4 + 5 + 3 = 12 1 Various factors may impact the results, including: Participant role / objectives Participant personality traits (e.g. risk aversion) When the comparison is performed

Impacting Achievement of Objectives Revenue Stability Conservation & Efficiency Affordability Understandability Increasing Base Rates / Decreasing Volume Rates   – Decreasing Base Rates / Increasing Volume Rates – –  Adding Usage Blocks / Tiers Increasing Higher-Block Volume Rates Adding Seasonal Volume Rate Differential Adding / Increasing Volume Allowance In Base Rate  : Improves achievement of objective – : Hinders achievement of objective

System Participation Fees What is growth’s equitable contribution to system costs?

SPF Overview The SPF is a connection charge authorized under RCW 35.92.025 that: Recovers an equitable share of system costs from development Is based on the cost of existing assets and future capital projects Provides a source of funding for capital projects and/or debt service What Can It Include? What Should It Exclude? Original cost of existing assets Interest accrued on assets (up to 10 years) Capital improvement program (uninflated) Assets funded by external sources Facilities paid for through other charges

Current System Participation Fees Single-Family Multi-Family Commercial Irrigation Water SPFs Up to 3/4” Meter $2,754 $4,515 $5,692 $4,498 1” Meter $6,885 $11,287 $14,231 $11,245 1-1/2” Meter $13,770 $22,575 $28,462 $22,490 2” Meter $22,033 $36,120 $45,539 $35,984 3” Meter $44,066 $72,241 $91,079 $71,968 4” Meter $68,854 $112,876 $142,311 $112,450 6” Meter $137,708 $225,753 $284,623 $224,901 Sewer SPFs $5,123 $3,178 per Unit $5,123 per ERU1 1Defined by the City as 20 fixture units.

Conceptual Methodologies System Buy-In Approach Based on existing system cost Up to ten years of accrued interest can be added Applied over existing customer base (or capacity) System Expansion Approach Focuses on future costs associated with expanding capacity Applied over incremental growth / capacity added Similar to an impact fee CFC = Existing System Cost Existing Customers CFC = Future Expansion Cost Future Growth

Conceptual Methodologies (Continued) CFC = Existing & Future Asset Cost Existing Customers & Growth Total Integrated System Integrated / Hybrid Approaches Blend of historical / future costs Applied over existing customer base (or capacity) Various allocation rules can apply CFC = Existing System Cost Existing Customers & Growth Future Expansion Cost Future Growth Modified Existing + Future Capacity CFC = Cost of Remaining Capacity Future Expansion Cost Future Growth Growth Allocation of Capacity

Choosing a Methodology System Buy-In Approach System Expansion Approach Integrated / Hybrid Approach Well Suited For… Mature systems with relatively little growth Newer systems expecting substantial growth Any system Pros Based exclusively on known information Relatively stable charges over time Recovers equitable share of growth-related costs from growth Generally results in more equitable charges Cons Does not recognize cost of oversizing existing system to serve growth Does not recover costs of oversizing existing facilities for growth Relatively volatile charges over time Potentially most complex calculation

Key Policy Questions: SPFs Which methodology should be used? System buy-in method? System expansion method? Variation of the hybrid method? How should recommended charges be implemented? Full calculated charges Phasing to full calculated charges Some level below full calculated charges Dependent on calculation results

Questions / Discussion

Chris Gonzalez (425) 867-1802 www.fcsgroup.com Project Manager chrisg@fcsgroup.com (425) 502-6280 Contact FCS GROUP: (425) 867-1802 www.fcsgroup.com