Pasadena Water and Power Public Hearing Date Water Capital Improvement Charge Pasadena City Council Meeting November 16, 2015 Agenda Item #13

Pasadena Water and Power Recommendation 1.Find that the Capital Improvement Charge (“CIC”) formula is exempt from the California Environmental Quality Act (“CEQA”) 2.Set the date of January 11, 2016 for a Public Hearing to: a.Approve the implementation of the CIC formula as defined in the Water Rate Ordinance to recover capital improvement costs of the water distribution system. Based on the current Fiscal Year (“FY”) 2016 Water Fund CIP budget, this would result in a system average increase of $0.45 per billing unit to the CIC effective 1/18/2016 b.Authorize implementation of the CIC formula for FY 2017 upon adoption of the CIP budget 2

Pasadena Water and Power Water Rate Components Distribution and Customer (D&C) Charge fixed charge generates revenues to recover maintenance and operations costs Includes Fire Protection Surcharge which covers the cost of fire hydrant replacements and upgrades that are not directly related to new development Commodity Charge volumetric charge generates revenues to cover the costs of actual water both groundwater and purchased water Purchased Water Adjustment Charge (PWAC) volumetric charge mechanism to recover the increased cost of water purchased from the Metropolitan Water District (“MWD”) Also applied to increased groundwater production costs Capital Improvement Charge (CIC) 100% volumetric charge generates revenues dedicated to capital improvements as approved in the Water Distribution System Master Plan Revenues also cover the debt service of bonds issued for investment in the water infrastructure. CIC $0.64 Current $ * System average rate based on 9.6 million billing units of sales

Pasadena Water and Power Water Fund Capital Funding Sources Capital Expenditure CIC Bond Funds and Pay- go Debt Service Non- CIC Bond Funds, Pay-go and outside sources Debt Service 4 CIC Rate provides pay-go funding for annual capital expenditures for long- term infrastructure CIC Rate provides funding for debt service on revenue bonds issued to fund capital expenditures for long-term infrastructure Non-CIC projects are funded by D&C revenues, customer requested projects, cash reserves, revenue bonds and outside sources Non-CIC Debt Service for debt issued prior to approval of the Water System Master Plan

Pasadena Water and Power Water Capital Projects Funded by the CIC Project Types IncludedProject Types Not Included Distribution main replacementsMeters and Services – customer requested Fire protection system improvementsWater Telemetry System (SCADA) Well and Booster Pump Switchgear Upgrades Facility Security Systems Recycled Water construction costs Reservoir ImprovementsWater IRP update Permanent infrastructure expansion/replacement Customer Billing System replacement Radio replacements Vehicle replacements 5 Water Master Plan approved by City Council in 2002 CIC formula and rate approved as part of funding plan for Master Plan Formula provides for annual adjustments based on adopted budget

Pasadena Water and Power Capital Improvement Charge History This Table is showing the history of rate increases to the Capital Improvement Charge. Established in FY2003 with an initial $0.20/billing unit, the charge has not been adjusted since July DateAdjustment Average Rate Per Billing Unit Sales Volumes (Million Billing Units) Approximate Revenues ($ Millions) 4/2003 CIC charge adopted $ $3.2 7/2004 Increased by approximately 22¢ $ $6.2 7/2006 Increased by approximately 12¢ $ $8.6 8/2007 Increased by approximately 12¢ $ $9.9 FY 2016 Current Rate $ $6.1 FY 2016 Proposed Rate $ $10.5

Pasadena Water and Power Water Sales (million BU/year) 7

Pasadena Water and Power CIC Rate Performance Five-year historic and Three-year projected 8 Projected Using CIC Formula Actual Results: CIC Formula was not utilized

Pasadena Water and Power Proposed CIC Formula-based Rate Adjustment 9 Formula ComponentDescriptionAmount CE5-year average CIC Capital Expenditure$10.9 A5-year average Cash Funded CIP (30% of CE)$3.3 B5-year average Debt Funded CIP (70% of CE)$7.6 DS5-year average CIC Related Debt Service$7.2 WS Water Sales in Billing Units 9.6 FTRFunding Target Ratio (A)/(A+B)$3.3 million / ($3.3 million + $7.6 million) = 30% CIC FormulaCapital Improvement Charge per Billing Unit ((FTR x CE) + DS) / WS ((30% x $10.9 million)+$7.2 million) / 9.6 million BU = $1.09 per BU

Pasadena Water and Power Sample Bill Impact on Monthly Charges (no reduction of water usage) Meter Size Monthly Usage Existing Monthly Charges Impact of Proposed Increase Revised Monthly Charges % Change 5/8"5$27.19$2.09 $ % 3/4"12$46.95$5.01 $ % 1"25$101.80$10.45 $ % 1 1/2"100$389.65$41.78 $ % 2"125$518.99$52.23 $ % 3”300$1,251.03$ $1, % 4"600$2,334.85$ $2, % 6"1,400$5,017.95$ $5, % 8"2,400$9,075.38$1, $10, % 10

Pasadena Water and Power Bill Impact with 25% Reduced Usage 11 Bill Comparisons Based on Reduced Water Consumption Historical UsageReduced Usage Monthly Usage (in billing units) 129 Existing Monthly Bill$46.95 $36.50 Impact of CIC Increase$5.04$3.78 Revised Monthly Bill$51.99$40.28 % Change10.7%(14.2%)

Pasadena Water and Power Other Agency Water Rate Actions Agency NameRate ActionWhen Effective RiversideCustomer chargePending January 2016 AnaheimCustomer chargePending February 2016 GlendaleDrought surchargeSpring 2015 Irvine Ranch Water District Multi-year rate action from cost of service update Beginning July 2015 LADWPFour-year rate plan, cost of service update Pending - Approved by Board October 2015, to be effective April 2016 Santa MonicaFive annual consecutive increases Annual beginning January 2014 Santa Margarita Water District Rate action of cost of service update January

Pasadena Water and Power City Council Actions That Could Reduce CIC Rate 1.Reduce level of capital improvement budget  More “deferred maintenance”  May result in more water main breaks and higher water losses  Higher future rate increases 2.Authorize additional debt issuance  Maintains higher level of capital investment  Increased debt service costs  Impacts funding target ratio of pay-go to long-term debt funding 3.Revise formula based on higher projected unit sales 4.Importance of taking current action  Mitigate part of FY 2016 net income reduction  Provide coverage of debt service requirements and some pay-go  Encourage additional conservation 13

Pasadena Water and Power Proposed Schedule for CIC Rate Adjustment 14 DateAction November 10, 2015MSC recommendation to set Public Hearing November 16, 2015City Council to set Public Hearing Date November 20, 2015 Notice of Public Hearing mailed per Prop 218 requirement January 11, 2016Public Hearing for CIC rate adjustment January 18, 2016 (soonest thereafter) New CIC rate becomes effective

Pasadena Water and Power Revised Draft Schedule: Water Cost of Service and Rate Redesign 15 DateAction March 2016MSC info item – rate structure discussion April 2016City Council – workshop discussion May and June 2016Customer outreach and feedback July 2016 MSC and City Council Action – rate recommendation and set public hearing September 2016Public Hearing and City Council Rate Action October 2016Rate action effective

Pasadena Water and Power 16

Pasadena Water and Power Attachment A - Table A-1 Historical Actual/ProjectedForecastFive-Year Average FY2011FY2012FY2013FY2014FY2015*FY2016FY2017FY2018FY2019FY2020HistoricForecastChange Actual Annual Sales (million BU) % System Average CIC Rate**$0.63$0.64 $1.09$1.11 $0.64$1.1174% Water Capital Expenditure CIC CapEx$8.60$7.40$12.30$15.70$7.10$9.80$12.40$11.90$13.20$7.20$10.22$10.907% Non-CIC CapEx$2.90$3.20$2.90$4.80$0.10$5.50$5.80$5.60$4.90 $2.78$5.3492% Total Capital Expenditures***$11.50$10.60$15.20$20.50$7.20$15.30$18.20$17.50$18.10$12.10$13.00$ % CIC-Funded Capital Expenditures Pay-go as % of Total CIC35% 30%35% 0% a Pay-go CIC CapEx$3.00$2.60$4.30$5.50$2.50$3.00$4.30$4.20$4.60$2.50$3.58$3.724% Bond funded CIC CapEx$5.60$4.80$8.00$10.20$4.60$6.90$8.00$7.70$8.60$4.70$6.64$7.188% Total CIC CapEx$8.60$7.40$12.30$15.70$7.10$9.80$12.40$11.90$13.20$7.20$10.22$10.907% Water System Debt Service b CIC Debt Service (DS)$5.10$5.60$5.50$6.00 $7.10$7.50 $7.80$5.64$7.1827% Non-CIC Debt Service (DS)$0.90$1.00 $1.10 $1.30 $1.40$1.02$1.2825% Total Debt Service$6.00$6.60$6.50$7.10 $8.40$8.80 $9.20$6.66$8.4627% CIC Cash Flow Balance CIC Revenues$7.60$7.90$8.40$8.80$7.90$7.40$11.04$11.48$11.82$12.26$8.12$ % Annual CIC Expense (a+b)$8.10$8.20$9.80$11.50$8.50$9.00$11.40$11.70$12.10$10.30$9.22$ % Surplus (Shortfall)****($0.50)($0.30)($1.40)($2.70)($0.60)($1.60)($0.36)($0.22)($0.28)$1.96($1.10)($0.10)-91% Non-CIC Expenditures (Info only) Non-CIC CapEx$2.90$3.20$2.90$4.80$0.10$5.50$5.80$5.60$4.90 $2.78$5.3492% Non-CIC Debt Service (DS)$0.90$1.00 $1.10 $1.30 $1.40$1.02$1.2825% Total Non-CIC Expenditures$3.80$4.20$3.90$5.90$1.20$6.60$7.10$6.90$6.20$6.30$3.80$6.6274% 17