1. City Of Phoenix Water Rates June 30, 2011 Denise Olson Deputy Finance Director Finance Department

2. Agenda  City of Phoenix Water System Overview  Legal Requirements & Industry Standards  Rate Setting Process  Reasons for Last Rate Increase  Water Rates  Rate Comparisons

3. Phoenix Water Services Background  Service Area: 540 square miles  System Includes:6 treatment plants 7,000 miles of water mains 21 active wells 109 water pump stations 53,000 fire hydrants  Fiscal Year 2011-12 Budget: $411 million  Number of positions (2010-11): 803  Net Assets FY 2010 = 1.2 billion  AAA Bond Rating

4. Distribution of Water Accounts by Major User Groups FY 2010 Accounts 403,000 Single-Family 88% Non-Residential 8% Multi-Family 4%

5. Distribution of Water Consumption by Major User Groups FY 2010 Single-Family 51% Multi-Family 15% Non-Residential 34% Consumption 119,411,848 ccf 1 ccf equals 748 gallons

6. Water & Wastewater Annual Budgeted Expenditures Debt Service 25% Pay as you Go Capital 27% Chemicals, Water & Electricity 15% Materials, Supplies, & Outside Services 16% Personnel 17%

7. Legal and Industry Standards  “Just and Reasonable” per ARS - Cost of Service Based  Federal Equal Protection Regulations - equity  Cost Recovery per Phoenix City Code  Revenue Stability  Cost of Providing Service Using Industry Standards (AWWA M1)  Rates Approved Through The Public Process per ARS

8. Public Notice Requirements per ARS title 9, ch 5, art 2, sec 9-511.01 & 9-499.15 Tasks Days to Effective Date Post Notification on City web >90 Council gives Notice of Intent >60 File Notice of Intent & rate record with Clerk >60 Publish Legal Advertising >40 Hold Public Hearing >30 Approve Rate Adjustment >30 Rate becomes Effective 0

9. Develop 10-Year CIP & (2 year) O&M Budget Develop Revenue Estimates Develop Revenue Estimates Determine Rate Increase Necessary to Support Financial Plan Prepare Financial Plan Prepare Financial Plan City Council Approves 5-Year CIP and Financial Plan City Council Authorizes First Year Rate Increase and Bond Authorizations Phoenix Annual Rate Development Process

10. Methods to Determine Required Revenues Cash Needs Approach (Municipal)/Phoenix Utility Approach (Similar to Investor-owned) O&M Costs Capital Expenditures Depreciation Expense and Rate of Return or cash funded Amortization of Debt Depreciation Expense Interest on Debt Rate of Return (utility risks) Taxes/PILOT (Payment in Lieu of Taxes) Taxes

11.  Debt payments for $1 billion in capital improvement projects for bonds issued in the last five years.  $200 million construction expenses required to comply with the Federally mandated Safe Drinking Water Act.  $15 million additional operational costs associated with Safe Drinking Water Act compliance.  Continued maintenance and replacement of an aging infrastructure.  And continued implementation of cost saving programs like the automatic meter reading equipment. FACTORS IMPACTING ADDITIONAL RATE REVENUE

12. Date of Increase Previous Forecast New 2011 Forecast March 2011 8.0%7.0% March 2012 8.0%7.0% March 2013 7.0%6.25% March 2014 7.0%5.5% March 2015 7.0%5.0% March 2016 Not Forecasted 5.0% PROJECTED WATER RATE INCREASES

13. Questions and Discussion

14. Water Fund Available Cash/Liquidity as Compared to Debt Service (With March 2011 Increase) Available Cash/Liquidity Debt Service FISCAL YEAR Assumes all future increases after March 2011 implemented and no change in expenditures. Financial policy is for available fund balances to equal, at a minimum, total debt service. Higher liquidity is required if debt service coverages are below recommended levels as is the case through 2015.

15. Water Fund Available Cash/Liquidity as Compared to Debt Service (No Increase in March 2011) Assumes all future increases after March 2011 implemented and no change in expenditures. Financial policy is for available fund balances to equal, at a minimum, total debt service. Higher liquidity is required if debt service coverages are below recommended levels. Available Cash/Liquidity Debt Service FISCAL YEAR

16. Standard & Poors: Phoenix, Arizona; Water/Sewer assigns AAA Rating and Stable - April 4, 2009  The stable outlook reflects our expectation that the systems’ strong financial performance will continue as the city implements its large CIP and regular annual rate increases.  The water system has a consistent history of city-approved rate increases, having implemented 19 rate increases in the last 20 years.

17. Water Base Charge MeterMonthly 5/8”$4.36 3/4”$4.45 1”$4.49 1-1/2”$5.57 2”$5.97 3”$20.23 4”$22.56 6”$24.60 Covers the cost to read the meter, bill and support the customer and maintain the meter Covers the cost to read the meter, bill and support the customer and maintain the meter Charge varies by meter size Charge varies by meter size Includes 6 ccf of water in winter months and 10 ccf in summer months. (Lifeline) Includes 6 ccf of water in winter months and 10 ccf in summer months. (Lifeline) Rates effective April 1, 2011

18. Water Volume Charge Winter Season Dec – Mar $2.44 Spring/Fall Season Apr, May, Oct, Nov $2.95 Summer Season Jun – Sep $3.77 Raw Water Costs Raw Water Costs All Other Costs to Treat and Deliver Water All Other Costs to Treat and Deliver Water Rate based on Seasonality of costs Rate based on Seasonality of costs Rates effective April 1, 2011

19. Water Environmental Charge Environmental Charge Environmental Charge Environmental Costs to Treat and Deliver Water Charged to total consumption Charged to total consumption Rate per ccf $0.42 Rates effective April 1, 2011

20. WATER & WASTEWATER RATE COMPARISONS COMBINED AVERAGE SINGLE-FAMILY MONTHLY BILL 20 LARGEST U.S. CITIES Water $/MONTH Wastewater Based on rates in effect October 1, 2010 $58.46 $56.25

21. WATER & WASTEWATER RATE COMPARISONS COMBINED AVERAGE SINGLE-FAMILY MONTHLY BILL SOUTHWEST REGION Water $/MONTH Wastewater Based on rates in effect October 1, 2010

22. WATER & WASTEWATER RATE COMPARISONS COMBINED AVERAGE SINGLE-FAMILY MONTHLY BILL PHOENIX METRO AREA Water $/MONTH Wastewater Based on rates in effect October 1, 2010 $105.99 $66.27 $60.88 $58.46 $58.28 $56.48$56.25 $54.52 $46.39

23. Proforma 7% rate increase

24. Objectives of Current Rate Structure  Understandable  Simpler to forecast revenues  Flattens peaks in Summer  Includes essential lifeline water demands  Stable monthly water bill for low volume users  Equitable by the fact that each customer pays same rate for water  Provides an incentive for all customers to conserve

25. Why Seasonal Rates  System capacity is designed to meet peak demands  Peak Demand in Phoenix is in Summer Months  Rate structure focuses on degree of variability in usage between seasons  Provide a price signal to the consumer during the peak period  Encourage efficient use of water system

26. Date of Increase Previous Forecast New Forecast 2011 Financial Plan March 2011 4.5%0.0% March 2012 4.5%0.0% March 2013 4.5%2.0% March 2014 4.5%3.0% March 2015 4.5%3.0% March 2016 Not Forecasted 2.0% PROJECTED WASTEWATER RATE INCREASES

27. Costs of Service Allocation Environmental Environmental Charge Environmental Model Cost of Service Rate Model Raw Water Treatment Distribution Customer Services Base Charge Volume Charge Meter Maintenance Base costs to meet average usage Base costs to meet average usage Extra costs to meet max day and max hour usage (Summer) Extra costs to meet max day and max hour usage (Summer)

28. Why No Customer Classes  Rates should allocate peak costs based on a customer’s contribution to that peak water demand  Customer classes are not the only method to fairly allocate peaking costs  City of Phoenix data shows that peaking characteristics do not vary materially among customer classes  Seasonal structure results in fairer and more equitable rates

29. Rates Compared to Billed ccfs $ Volume Charge per Month Monthly Billable Units CCfs

30. Water & Wastewater Annual Budgeted Expenditures Debt Service 25% Pay as you Go Capital 27% Chemicals, Water & Electricity 15% Materials, Supplies, & Outside Services 16% Personnel 17% $761 Million