1. THE FOSTER GROUP TFGTFG City of Detroit Water and Sewerage Department Wholesale Customer Rates Meeting Sewage Disposal System Meeting #2 – Projected FY 2010-11 Revenue Requirements November 19, 2009

2. THE FOSTER GROUP TFGTFG 11/19/09 Customer Rate Season Schedule This is the second of a series of meetings This is the second 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

3. THE FOSTER GROUP TFGTFG 11/19/09 Information Portals DWSD web site DWSD web site www.dwsd.org www.dwsd.org www.dwsd.org Customer Information / “Wholesale Customers Season Rate Schedule” Customer Information / “Wholesale Customers Season Rate Schedule” eroom eroom For information contact Teresa Newman For information contact Teresa Newman teresa@projectinnovations.com teresa@projectinnovations.com teresa@projectinnovations.com Page 3

4. THE FOSTER GROUP TFGTFG 11/19/09 Today’s Agenda Rollout Presentation Rollout Presentation Preliminary Units of Service for FY 2010-11 Sewer Rates Preliminary Units of Service for FY 2010-11 Sewer Rates Preliminary Revenue Requirements (And System Revenue) for FY 2010-11 Preliminary Revenue Requirements (And System Revenue) for FY 2010-11 Introduction of Cost of Service Allocation Issues for FY 2010-11 Sewer Rates Introduction of Cost of Service Allocation Issues for FY 2010-11 Sewer Rates Sewer Rates Work Group Sewer Rates Work Group Flow Balance Issues Flow Balance Issues Fixed vs. Commodity Cost Recovery Fixed vs. Commodity Cost Recovery FY 2007-08 Look-Back Update FY 2007-08 Look-Back Update OMI Transfer Rate Issues OMI Transfer Rate Issues Page 4

5. THE FOSTER GROUP TFGTFG 11/19/09 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

6. THE FOSTER GROUP TFGTFG 11/19/09 How was the DWSD sewer rate methodology established? Current basic methodology originally implemented in 1980 Current basic methodology originally implemented in 1980 Data from Segmented Facilities Plan Data from Segmented Facilities Plan Rate Settlement Agreements Rate Settlement Agreements 1978, 1980, 1982, 1995, 1999 1978, 1980, 1982, 1995, 1999 Establish overriding concept of "proportionality" Establish overriding concept of "proportionality"  EPA User Charge Requirements Minor modifications through 1998 Minor modifications through 1998 Recognize availability of additional data Recognize availability of additional data Page 6

7. THE FOSTER GROUP TFGTFG 11/19/09 How was the DWSD sewer rate methodology established? (cont’d) 1999 Rate Settlement Agreement 1999 Rate Settlement Agreement Significant Changes in Rate Model Significant Changes in Rate Model  Combined Sewer Overflow Facilities  Utilization of New Technical Data  Implementation Provisions Subsequent Activities – Sewer Rates Work Group Subsequent Activities – Sewer Rates Work Group Refine Estimates and Implementation Provisions Refine Estimates and Implementation Provisions 2008 Rate Settlement Agreement 2008 Rate Settlement Agreement Resolves Issues Related to Resolves Issues Related to  Oakland Macomb Interceptor  800 mhz Radio System Page 7

8. THE FOSTER GROUP TFGTFG FY 2010-11 Units of Service – Sewage Disposal System

9. THE FOSTER GROUP TFGTFG 11/19/09 Annual Flow Volumes Use in Rate Model Use in Rate Model Project revenue base Project revenue base Forms initial basis for allocating costs to customers Forms initial basis for allocating costs to customers Actual figures subject to technical review using protocol set forth by GDRSS Billing Workgroup Actual figures subject to technical review using protocol set forth by GDRSS Billing Workgroup Modifications to Billed Sewer Volumes - PENDING Modifications to Billed Sewer Volumes - PENDING Page 9

10. THE FOSTER GROUP TFGTFG 11/19/09 Annual Flow Volumes Projection Method Review Historical Data Review Historical Data Project Rate Year Based on Regression Analyses, etc. Project Rate Year Based on Regression Analyses, etc. Transmit Projections to Customer Communities Transmit Projections to Customer Communities Utilize Input from Customers Utilize Input from Customers Page 10

11. THE FOSTER GROUP TFGTFG 11/19/09 Annual BILLED Flow Volumes Summary of FY 2008-09: Summary of FY 2008-09: SYSTEM ~ ON TARGET SYSTEM ~ ON TARGET Sub Wholesale ~ 6% Above Target Sub Wholesale ~ 6% Above Target Detroit Retail ~ 21% Below Target Detroit Retail ~ 21% Below Target More Conservative Projection Approach Established for FY 2009-10 Rates More Conservative Projection Approach Established for FY 2009-10 Rates Continued for FY 2010-11 Continued for FY 2010-11 Page 11

12. THE FOSTER GROUP TFGTFG 11/19/09 Annual Billed Wastewater Volumes – (mgd) Page 12

13. THE FOSTER GROUP TFGTFG 11/19/09 Annual Suburban Wholesale Billed Volumes – (mgd) Page 13

14. THE FOSTER GROUP TFGTFG 11/19/09 Annual Suburban Wholesale Billed Volumes – (mgd) Page 14

15. THE FOSTER GROUP TFGTFG 11/19/09 Annual Detroit Retail Billed Volumes - (mgd) Page 15

16. THE FOSTER GROUP TFGTFG 11/19/09 Flow Volumes – Types of Flow Two types of customers Two types of customers Billing Meter Customers Billing Meter Customers System Meter (Unmetered) Customers System Meter (Unmetered) Customers Three types of flow are estimated for each customer Three types of flow are estimated for each customer Sanitary Sanitary Dry Weather Infiltration & Inflow (DWII) Dry Weather Infiltration & Inflow (DWII) Wet Weather Flows Wet Weather Flows Page 16

17. THE FOSTER GROUP TFGTFG 11/19/09 Principles for Recognizing GDRSS Flow Information in Rate Model Reflect changes to major system parameters in full starting with any fiscal year during which data is available and acceptable for at least 1/2 of the fiscal year. Reflect changes to major system parameters in full starting with any fiscal year during which data is available and acceptable for at least 1/2 of the fiscal year. Each customer community should bear the onus of presenting specific information regarding changes in its collection system to DWSD identify appropriate action. Each customer community should bear the onus of presenting specific information regarding changes in its collection system to DWSD identify appropriate action. Metered water sales will continue to serve as the proxy for sanitary wastewater flows for System Meter Customers. Metered water sales will continue to serve as the proxy for sanitary wastewater flows for System Meter Customers. Page 17

18. THE FOSTER GROUP TFGTFG 11/19/09 Principles for Recognizing GDRSS Flow Information in Rate Model (cont’d) Quality control and quality assurance review on the estimates of dry weather I/I currently assigned to customer communities will continue. Quality control and quality assurance review on the estimates of dry weather I/I currently assigned to customer communities will continue. A five-year averaging technique will be applied with respect to estimates of dry weather I/I and wet weather flow. A five-year averaging technique will be applied with respect to estimates of dry weather I/I and wet weather flow. GDRSS data may at some point be available in a timely enough manner to incorporate it directly in monthly (or quarterly) billing to customer communities. GDRSS data may at some point be available in a timely enough manner to incorporate it directly in monthly (or quarterly) billing to customer communities. Page 18

19. THE FOSTER GROUP TFGTFG 11/19/09 Dry Weather Infiltration & Inflow (DWII) Calculations Based on 5-year average of GDRSS “best available” information Based on 5-year average of GDRSS “best available” information Annual flow balancing analyses Annual flow balancing analyses Allocates I/I on common use interceptors, sewers, and customer connections based on protocol established by the Common Use Sewer Workgroup Allocates I/I on common use interceptors, sewers, and customer connections based on protocol established by the Common Use Sewer Workgroup Page 19

20. THE FOSTER GROUP TFGTFG 11/19/09 Sewer Infiltration/Inflow Calculations Very Similar I/I Results from 2009 Analysis Compared to 2008 Very Similar I/I Results from 2009 Analysis Compared to 2008 Some Significant Variances Amongst Suburban Customers Some Significant Variances Amongst Suburban Customers 5-Year Average for Rates 5-Year Average for Rates Page 20

21. THE FOSTER GROUP TFGTFG 11/19/09 Wet Weather Inflow Calculations Based on 5-year average of GDRSS “best available” information Based on 5-year average of GDRSS “best available” information Computes estimated wet weather flows to collection system from each customer Computes estimated wet weather flows to collection system from each customer Applies uniform “overflow credit” to all customers Applies uniform “overflow credit” to all customers Protocol established by the 1999 Rate Settlement Agreement Protocol established by the 1999 Rate Settlement Agreement Page 21

22. THE FOSTER GROUP TFGTFG 11/19/09 Wet Weather Inflow Calculations Suggested WWWG Changes Deduct Dry Weather Flow from Total Annual Flow Deduct Dry Weather Flow from Total Annual Flow 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 22

23. THE FOSTER GROUP TFGTFG 11/19/09 Sanitary Flow Calculations Billing Meter Customers Billing Meter Customers Sanitary = Sanitary =  Adjusted metered flow  Less: DWII estimate  Less: Wet weather estimate (before overflow credit) System Meter Customers System Meter Customers Sanitary = 90% of metered or estimated water sales Sanitary = 90% of metered or estimated water sales Page 23

24. THE FOSTER GROUP TFGTFG FY 2010-11 Revenue Requirement Levels – Sewage Disposal System

25. THE FOSTER GROUP TFGTFG 11/19/09 DWSD has established preliminary revenue requirements for FY 2010-11 DWSD has established preliminary revenue requirements for FY 2010-11 Meeting these revenue requirements will require a revenue (System rate) increase Meeting these revenue requirements will require a revenue (System rate) increase Current planning is being refined, and the precise amount of that increase is not yet known Current planning is being refined, and the precise amount of that increase is not yet known Today DWSD is presenting information that reflects the approximate mid-point of a range of possible outcomes Today DWSD is presenting information that reflects the approximate mid-point of a range of possible outcomes Preliminary Revenue Requirement Planning Page 25

26. THE FOSTER GROUP TFGTFG Rate Development Challenges for FY 2010-11 Availability of Historical Financial Data Availability of Historical Financial Data In a perfect year, we’d have audited results for FY 2008-09 to help guide assumptions, etc. In a perfect year, we’d have audited results for FY 2008-09 to help guide assumptions, etc.  Won’t be available until ???? Audited figures for FY 2007-08 were expected Spring 2009 Audited figures for FY 2007-08 were expected Spring 2009  Still not yet finalized 11/19/09 Page 26

27. THE FOSTER GROUP TFGTFG 11/19/09 Mechanics Associated with Establishing Revenue Requirement Levels Cash Requirements (RATES) Accrual Requirements (FINANCIAL STATEMENTS) Coverage Req’ts (BOND COVENANTS) Page 27 Revenue Financed Capital Reserve Deposits Debt Service Principal Operation and Maintenance Debt Service Interest Operation and Maintenance Debt Service Principal Debt Service Interest Operation and Maintenance Depreciation Expense X% of Debt Service Principal & Interest

28. THE FOSTER GROUP TFGTFG 11/19/09 PRELIMINARY FY 2010-11 Sewer Revenue Requirements ($millions) Cash Requirements (RATES) O&M = $220.1 Int = $135.4 Page 28 Prin = $72.6 RFC = $23.2 Rsrvs = $2.8 TOTAL = $454.0 Accrual Requirements (FINANCIAL STATEMENTS) Int = $135.4 Depr = $90.0 O&M = $220.1 TOTAL = $445.4 Coverage Req’ts (BOND COVENANTS) Prin = $72.6 Covg = $26.0 (Ratio = 1.125) O&M = $220.1 Int = $135.4 TOTAL = $454.0

29. THE FOSTER GROUP TFGTFG 11/19/09 Budget Request Under Review Budget Request Under Review Enhanced strategic review process Enhanced strategic review process Process will extend beyond rate development season Process will extend beyond rate development season Budget for Purposes of Rate Development reflects overall target based on review of preliminary request and preliminary FY 2008-09 actual Budget for Purposes of Rate Development reflects overall target based on review of preliminary request and preliminary FY 2008-09 actual Target may be adjusted as rate development process proceeds Target may be adjusted as rate development process proceeds Reflects revised allocation of fringe benefits from water to sewer Reflects revised allocation of fringe benefits from water to sewer Operation and Maintenance Expense Budget Page 29

30. THE FOSTER GROUP TFGTFG Recent DWSD Operating Expenses – Combined Water & Sewer 11/19/09 Page 30

31. THE FOSTER GROUP TFGTFG FY 2010-11 Budget Target – Combined Water & Sewer 11/19/09 Page 31

32. THE FOSTER GROUP TFGTFG FY 2007-08 O&M Expense – Water and Sewer Portions 11/19/09 Page 32

33. THE FOSTER GROUP TFGTFG DWSD Strategic Cost Reduction Program for FY 2010-11 Budget Identify Core & Critical Support Services Eliminate Duplications & Non-Value Added Activities Define Roles & Responsibilities for Divisions Conduct Budget Analysis for Proposed Changes 11/19/09 Aug 09Dec 09Feb 10Mar 10 Prepare Implementation Plan Finalize and Communicate Plan Measure, Monitor, & Report Validate Assumptions & Revise Plan Apr 10May 10July 10> Ongoing Page 33

34. THE FOSTER GROUP TFGTFG 11/19/09 Existing Funds, augmented by projected revenue transfers, sufficient to finance CIP through June 2011 Existing Funds, augmented by projected revenue transfers, sufficient to finance CIP through June 2011 No issuance of additional debt anticipated to be supported by FY 2010-11 rates No issuance of additional debt anticipated to be supported by FY 2010-11 rates Debt service increase reflects initial principal amortization of 2006 Bonds Debt service increase reflects initial principal amortization of 2006 Bonds Capital Financing Plan Page 34

35. THE FOSTER GROUP TFGTFG DWSD Debt Service – Fund Sewer CIP thru 2013 (last year) 11/19/2008 Page 35

36. THE FOSTER GROUP TFGTFG DWSD Debt Service – Fund Sewer CIP thru 2014 (this year) 11/19/2008 Page 36

37. THE FOSTER GROUP TFGTFG 11/19/09 Sewage Disposal System Preliminary Revenue Level Page 37

38. THE FOSTER GROUP TFGTFG 11/19/09 Preliminary Sewer Rate Level – Increase Drivers Page 38

39. THE FOSTER GROUP TFGTFG 11/19/09 Final Budget Request Modifications Final Budget Request Modifications Determination of Final Revenue Requirement Level Determination of Final Revenue Requirement Level Specific operating cost allocations Specific operating cost allocations Ongoing Review of FY 2007-08 and FY 2008- 09 Financial Data Ongoing Review of FY 2007-08 and FY 2008- 09 Financial Data Specific operating cost allocations Specific operating cost allocations Allocation of capital program and fixed asset data Allocation of capital program and fixed asset data Ongoing review of flow balance data and related issues Ongoing review of flow balance data and related issues Adjustments to reflect transfer of OMI Adjustments to reflect transfer of OMI Potential shift to Utility Basis Potential shift to Utility Basis Cost Allocation to Customers Status Report Page 39

40. THE FOSTER GROUP TFGTFG Sewer Cost of Service Issues FY 2010-11 Flow Balance Issues Flow Balance Issues Alternative flow allocation approach? Alternative flow allocation approach? Reflect any changes to overflow %’s? Reflect any changes to overflow %’s? What about I/I strength vs. sanitary strength? What about I/I strength vs. sanitary strength? OMI Transfer & Impact on Capital Allocations OMI Transfer & Impact on Capital Allocations Utility Basis Utility Basis Facilitated by OMI Transfer Facilitated by OMI Transfer Ties capital allocations to more reliable data Ties capital allocations to more reliable data Will result in cost shift Will result in cost shift Manner in which Look-Back is implemented Manner in which Look-Back is implemented 11/19/09 Page 40

41. THE FOSTER GROUP TFGTFG 11/19/09 Next Steps Rate Development Process will continue Rate Development Process will continue Sewer Rates Work Group Discussions Sewer Rates Work Group Discussions Next meeting Next meeting December 17 – Intent is to Present Preliminary FY 2010-11 Revenue Requirement Allocations to Customers December 17 – Intent is to Present Preliminary FY 2010-11 Revenue Requirement Allocations to Customers Page 41

42. THE FOSTER GROUP TFGTFG 11/19/09 Takeaways DWSD Has Announced a Preliminary Overall SYSTEM Revenue Increase RANGE of 6% to 10% DWSD Has Announced a Preliminary Overall SYSTEM Revenue Increase RANGE of 6% to 10% Review is Ongoing and this May Change Review is Ongoing and this May Change IMPACTS ON INDIVIDUAL CUSTOMERS HAVE NOT BEEN DETERMINED IMPACTS ON INDIVIDUAL CUSTOMERS HAVE NOT BEEN DETERMINED IT IS NOT ACCURATE TO ASSUME THAT ALL RATES ARE GOING TO BE INCREASED BY THIS RANGE IT IS NOT ACCURATE TO ASSUME THAT ALL RATES ARE GOING TO BE INCREASED BY THIS RANGE Page 42