THE FOSTER GROUP TFGTFG City of Detroit Water and Sewerage Department Wholesale Customer Rates Meeting Sewage Disposal System Meeting #4 Preliminary Proposed FY Sewer Rates January 21, 2010

THE FOSTER GROUP TFGTFG 1/21/10 Customer Rate Season Schedule This is the third of a series of meetings This is the third of a series of meetings 10/13 –Capital Improvement Program Presentation 10/13 –Capital Improvement Program Presentation 11/19 – Units of Service, Preliminary SYSTEM Revenue Levels 11/19 – Units of Service, Preliminary SYSTEM Revenue Levels 12/17 – Preliminary Cost Allocations to Customers 12/17 – Preliminary Cost Allocations to Customers 1/21/2010 – Preliminary Individual Rate Proposals 1/21/2010 – Preliminary Individual Rate Proposals 2/24/2010 – BOWC Public Hearing 2/24/2010 – BOWC Public Hearing 3/ /2010 – City Council Public Hearing 3/ /2010 – City Council Public Hearing 7/1/2010 – Effective Date for Rates 7/1/2010 – Effective Date for Rates Parallel meetings of Partnership Work Groups Parallel meetings of Partnership Work Groups Page 2

THE FOSTER GROUP TFGTFG 1/21/10 Information Portals DWSD web site DWSD web site Customer Information / “Wholesale Customers Season Rate Schedule” Customer Information / “Wholesale Customers Season Rate Schedule” DWSD Customer Outreach Portal DWSD Customer Outreach Portal For information contact Teresa Newman For information contact Teresa Newman Page 3

THE FOSTER GROUP TFGTFG 1/21/10 Today’s Agenda Rollout Presentation Rollout Presentation Updated Preliminary Revenue Requirements (And System Revenue) for FY Updated Preliminary Revenue Requirements (And System Revenue) for FY Updated Units of Service and Cost of of Service Allocations to Customers Updated Units of Service and Cost of of Service Allocations to Customers Presentation of Preliminary Proposed Rates to Customers Presentation of Preliminary Proposed Rates to Customers Illustration of Rate Calculation Illustration of Rate Calculation Sewer Rates Work Group Sewer Rates Work Group Detailed Discussions on Rate Issues Detailed Discussions on Rate Issues Page 4

THE FOSTER GROUP TFGTFG 1/21/10 The 3 Fundamental Steps in the Sewer Rate Methodology Revenue Requirement Projections Revenue Requirement Projections How Much Money is Needed? How Much Money is Needed? Cost of Service Analysis Cost of Service Analysis From Whom Should the Money be Collected? From Whom Should the Money be Collected? Design of Recommended Rates Design of Recommended Rates How Should DWSD Services be Priced? How Should DWSD Services be Priced? Page 5

THE FOSTER GROUP TFGTFG Timeout for Some Perspective...

THE FOSTER GROUP TFGTFG 1/21/10 DWSD Sewer Rate Changes ( ) Avg =3.0% Avg =6.5% Avg =3.2% Avg =6.4% Page 7

THE FOSTER GROUP TFGTFG 1/21/10 Annual Capital Improvement Investments Sewage Disposal System – ($ millions) Page 8

THE FOSTER GROUP TFGTFG 1/21/10 Compliance with Wastewater Treatment Standards - A Very Possible Potential Reality Sanitary CSO Stormwater Page 9

THE FOSTER GROUP TFGTFG 1/21/10 Funding Wastewater Infrastructure: A Historical Perspective Citizen Goals Federal Representative Communities State Agency EPA Utility Page 10

THE FOSTER GROUP TFGTFG Water Industry (AWWA) Perspective on Financing Infrastructure Primary focus has always been local, and should remain so Primary focus has always been local, and should remain so Aging infrastructure is an issue in the US, but it is not at a crisis, and it is not all “crumbling” Aging infrastructure is an issue in the US, but it is not at a crisis, and it is not all “crumbling” There is a role for the federal government in lowering cost of capital and in special circumstances, but water infrastructure challenges are not primarily federal problems There is a role for the federal government in lowering cost of capital and in special circumstances, but water infrastructure challenges are not primarily federal problems 1/21/10 Page 11

THE FOSTER GROUP TFGTFG Water Industry (AWWA) Perspective on Financing Infrastructure Water trust fund is not the most effective option Water trust fund is not the most effective option Overhead costs of sending money to Washington rather than retaining it locally Overhead costs of sending money to Washington rather than retaining it locally Encouragement of delay in establishing true cost rates while local officials wait for trust fund assistance Encouragement of delay in establishing true cost rates while local officials wait for trust fund assistance Congress’ history of not spending revenues on purpose for which they were collected Congress’ history of not spending revenues on purpose for which they were collected 1/21/10 Page 12

THE FOSTER GROUP TFGTFG Water Industry (AWWA) Perspective on Financing Infrastructure More effective financing tools include: More effective financing tools include: Enhancement of existing SRF programs Enhancement of existing SRF programs Removal of annual volume caps for private activity bonds Removal of annual volume caps for private activity bonds Full cost pricing for water service Full cost pricing for water service Creation of federal water infrastructure bank Creation of federal water infrastructure bank AWWA opposes national water tax AWWA opposes national water tax Inefficient, regressive, inequitable and punishes communities that have responsibly addressed local concerns Inefficient, regressive, inequitable and punishes communities that have responsibly addressed local concerns 1/21/10 Page 13

THE FOSTER GROUP TFGTFG FY Sewage Disposal System Revenue Requirement Update

THE FOSTER GROUP TFGTFG 1/21/10 Updated Sewage Disposal System FY Revenue Requirements Projected Revenues have been decreased Projected Revenues have been decreased DWSD’s intention is to begin billing OMI District for Flows measured at single meter upstream of Northeast Pump Station DWSD’s intention is to begin billing OMI District for Flows measured at single meter upstream of Northeast Pump Station Initial technical data had indicated additional flow would accrue Initial technical data had indicated additional flow would accrue Technical data needs additional review Technical data needs additional review At Sewer Rates Work Group’s request, FY Sewer Rates will not anticipate the increase pending further review At Sewer Rates Work Group’s request, FY Sewer Rates will not anticipate the increase pending further review Page 15

THE FOSTER GROUP TFGTFG 1/21/10 Updated Sewage Disposal System FY Revenue Requirements Budgeted operating expenses in financial plan for rates reduced by 2% Budgeted operating expenses in financial plan for rates reduced by 2% Reflects Management’s expectations regarding outcomes of strategic process Reflects Management’s expectations regarding outcomes of strategic process Reflects desire to offset negative rate consequences of revenue reduction noted above Reflects desire to offset negative rate consequences of revenue reduction noted above Debt Service Coverage mildly reduced Debt Service Coverage mildly reduced Reflects fact that some implementation of FY and FY Look-Back will count as FY revenue Reflects fact that some implementation of FY and FY Look-Back will count as FY revenue Page 16

THE FOSTER GROUP TFGTFG FY Budget Target – Combined Water & Sewer 1/21/10 Page 17

THE FOSTER GROUP TFGTFG 1/21/10 Page 18 Sewage Disposal System Preliminary Revenue Level – December Projection

THE FOSTER GROUP TFGTFG 1/21/10 Page 19 Sewage Disposal System Preliminary Revenue Level – Proposed Projection

THE FOSTER GROUP TFGTFG 1/21/10 Preliminary Sewer Rate Level – Increase Drivers Page 20

THE FOSTER GROUP TFGTFG Updated Allocation of FY Sewage Disposal System Revenue Requirements to Customers

THE FOSTER GROUP TFGTFG 1/21/10 Updated Revenue Requirements to Customers As discussed at prior meetings, two methodology modifications are being proposed As discussed at prior meetings, two methodology modifications are being proposed Flow Balance Issues Flow Balance Issues Alternative flow allocation approach? YES Alternative flow allocation approach? YES Reflect any changes to overflow %’s? NO Reflect any changes to overflow %’s? NO What about I/I strength vs. sanitary strength? NO What about I/I strength vs. sanitary strength? NO Utility Basis YES Utility Basis YES Facilitated by OMI Transfer Facilitated by OMI Transfer Ties capital allocations to more reliable data Ties capital allocations to more reliable data Results in minor (+/- 2%) cost shift Results in minor (+/- 2%) cost shift Page 22

THE FOSTER GROUP TFGTFG 1/21/10 Wet Weather Inflow Calculations Suggested WWWG Changes Deduct Dry Weather Flow from Total Annual Flow to Determine Wet Weather Volume Deduct Dry Weather Flow from Total Annual Flow to Determine Wet Weather Volume Compute Inferred “Delivery Coefficient” Compute Inferred “Delivery Coefficient” Recalculate Overflow Credit Factor(s)? Recalculate Overflow Credit Factor(s)? Estimating Techniques for System Meter Customers? Estimating Techniques for System Meter Customers? Understand/Reflect Differential Flow Quality Issues? Understand/Reflect Differential Flow Quality Issues? Page 23

THE FOSTER GROUP TFGTFG 1/21/10 Utility Basis for FY Sewer Rates Benefits include: Benefits include: More reliable and stable source for capital cost allocation More reliable and stable source for capital cost allocation Better “generational equity” alignment with cost recovery and use of assets over their useful life Better “generational equity” alignment with cost recovery and use of assets over their useful life Per 1978 Rate Settlement Agreement, no differential in rate of return between Detroit and Suburban customers Per 1978 Rate Settlement Agreement, no differential in rate of return between Detroit and Suburban customers Reflects detailed review of DWSD’s Fixed Asset records Reflects detailed review of DWSD’s Fixed Asset records Page 24

THE FOSTER GROUP TFGTFG 1/21/10 Sample Capital Cost Recovery for DWSD Infrastructure Investment * Includes principal, interest, and debt service coverage ** Includes depreciation expense and return on rate base Page 25

THE FOSTER GROUP TFGTFG 1/21/10 Conversion of FY Revenue Req’ts to Utility Basis – ($millions) Page 26

THE FOSTER GROUP TFGTFG Preliminary Proposed FY Sewer Rates

THE FOSTER GROUP TFGTFG 1/21/10 Proposed Rates for FY Minor Rate Calculation Change Vetted by Sewer Rates Work Group Vetted by Sewer Rates Work Group Fixed Monthly Charge component includes recovery of “Wholesale Only” costs related with: Fixed Monthly Charge component includes recovery of “Wholesale Only” costs related with: Master Meters Master Meters Customer Outreach Support Customer Outreach Support Previously collected through commodity element Previously collected through commodity element Results in lower commodity rates, higher fixed monthly charges Results in lower commodity rates, higher fixed monthly charges Page 28

THE FOSTER GROUP TFGTFG 1/21/10 Next Steps Rates will become “proposed” when submitted to Board of Water Commissioners Rates will become “proposed” when submitted to Board of Water Commissioners Formal notification will be mailed Formal notification will be mailed Ongoing review of all revenue requirement, cost of service allocation, and rate design calculations Ongoing review of all revenue requirement, cost of service allocation, and rate design calculations Next meetings Next meetings Immediately following – Sewer Rates Work Group Immediately following – Sewer Rates Work Group February 24, 2010 – Board of Water Commissioners Public Hearing on Proposed FY Water Rates February 24, 2010 – Board of Water Commissioners Public Hearing on Proposed FY Water Rates Page 29

THE FOSTER GROUP TFGTFG 1/21/10 Takeaways DWSD announces a reduced preliminary estimate of Overall SYSTEM Revenue Increase from 7.4% to 6.8% DWSD announces a reduced preliminary estimate of Overall SYSTEM Revenue Increase from 7.4% to 6.8% DWSD has presented preliminary proposed rates for FY DWSD has presented preliminary proposed rates for FY Proposed rates remain under review Proposed rates remain under review Page 30

THE FOSTER GROUP TFGTFG Sample Sewer Rate Calculation

THE FOSTER GROUP TFGTFG 1/21/10 Wastewater Volume Wastewater Volume Sanitary Sanitary Dry Weather Infiltration/Inflow Dry Weather Infiltration/Inflow Wet Weather Flows Wet Weather Flows  Uniform Overflow Credit Wastewater Strength Wastewater Strength Industrial Surcharge Customers Industrial Surcharge Customers All Other “Domestic” All Other “Domestic” Detroit CSO Facilities Detroit CSO Facilities 83% Detroit 83% Detroit 17% Suburban 17% Suburban  Detailed Allocation Determine Units of Service Page 32

THE FOSTER GROUP TFGTFG 1/21/10 Allocate Costs to Functions Wastewater Volume (Domestic Strength) Industrial Specific CSO Collection System Specific Page 33

THE FOSTER GROUP TFGTFG 1/21/10 Determine Unit Costs of Service Determine Unit Costs of Service Divide Functional Costs by Units of Service Divide Functional Costs by Units of Service Apply Uniform Unit Costs of Service to Customer Specific Units of Service Apply Uniform Unit Costs of Service to Customer Specific Units of Service Allocate Costs to Customers Page 34

THE FOSTER GROUP TFGTFG 1/21/10 Recognize Settlement Agreement Adjustments Page 35

THE FOSTER GROUP TFGTFG 1/21/10 Commodity Charge Commodity Charge Recovers Costs Associated With: Recovers Costs Associated With:  Sanitary Volume  Dry Weather Infiltration/Inflow Fixed Monthly Charge Fixed Monthly Charge Recovers Costs Associated With: Recovers Costs Associated With:  Wet Weather Flow  Customer Specific Costs  Detroit CSO Program  Wholesale Only Costs Calculate Rates Page 36