city of thousand oaks attachment #2

Water Financial Plan and Cost of

Service Study Final Report / February 1, 2016

CITY OF THOUSAND OAKS

pwdzambran

Typewritten Text

ATTACHMENT #2

445 S. Figueroa Street Suite #2270

Los Angeles, CA 90071

Phone 213.262.9300 Fax 213.262.9303

www.raftelis.com

February 1, 2016

Mr. Jay T. Spurgin Public Works Director City of Thousand Oaks 2100 Thousand Oaks Blvd Thousand Oaks, CA 91362

Subject: Water Financial Plan and Cost of Service Study Report

Dear Mr. Spurgin: Raftelis Financial Consultants, Inc. (RFC) is pleased to present this report on the water financial plan an cost of service study (Study) to the City of Thousand Oaks (City). We are confident that the results based on a cost of service analysis will result in fair and equitable rates to the City’s customers and comply with the requirements of Proposition 218. The Study involved a comprehensive review of the City’s financial plan, capital needs, user classifications and rate structures. It was a pleasure working with you and we wish to express our thanks to you, Ms. Nancy Arrieta, and participating staff members of the City for the support and cooperation extended throughout the Study. If you have any questions, please call me at (213) 262-9304. Sincerely, RAFTELIS FINANCIAL CONSULTANTS, INC.

Sanjay Gaur Akbar Alikhan

Vice President Consultant

http://www.raftelis.com/

3 | City of Thousand Oaks

TABLE OF CONTENTS

1. EXECUTIVE SUMMARY ...................................................................... 8

STUDY BACKGROUND .............................................................................................. 8

OBJECTIVES OF THE STUDY ................................................................................... 8

RESULTS AND RECOMMENDATIONS ..................................................................... 9

Proposed Financial Plan .................................................................................................... 9

Factors Affecting Revenue Adjustments .......................................................................... 9

Functionalization of Costs ............................................................................................... 11

Proposed Rate Structure .................................................................................................. 12

Proposed Variable and Fixed Rates ................................................................................ 13

2. INTRODUCTION ................................................................................. 15

STUDY BACKGROUND .............................................................................................15

OBJECTIVES OF THE STUDY ..................................................................................15

PROCESS ..................................................................................................................16

LEGAL REQUIREMENTS AND RATE SETTING METHODOLOGY ..........................17

California Constitution - Article XIII D, Section 6 (Proposition 218) ............................ 17

California Constitution - Article X, Section 2 ................................................................. 17

Cost-Based Rate-Setting Methodology........................................................................... 18

3. GENERAL ASSUMPTIONS ................................................................ 20

INFLATION.................................................................................................................20

PROJECTED DEMAND AND GROWTH ....................................................................20

RESERVE POLICY ....................................................................................................21

O&M Cash Flow (Fund 611) .............................................................................................. 21

Capital Emergency (Fund 613) ......................................................................................... 22

Capital R&R (Fund 613) .................................................................................................... 22

Proposed Water Reserves ................................................................................................ 23

4. WATER SYSTEM FINANCIAL PLAN ................................................. 24

REVENUES FROM CURRENT WATER RATES........................................................24

Miscellaneous Revenue .................................................................................................... 27

O&M EXPENSES .......................................................................................................28

Water Supply Costs .......................................................................................................... 28

Water Operating Expenses .............................................................................................. 29

PROGRAMMED CAPITAL IMPROVEMENT PROJECTS (CIP) ................................29

STATUS QUO POTABLE WATER FINANCIAL PLAN ..............................................30


RECOMMENDATIONS AND PROPOSED REVENUE ADJUSTMENTS ...................32

Proposed Financial Plan .................................................................................................. 32

5. PROPOSED TIER DEFINITIONS ....................................................... 35

CURRENT TIER DEFINITIONS ..................................................................................35

PROPOSED TIER DEFINITIONS ...............................................................................35

Tier 1 Break Point Rationale ............................................................................................ 35

Tier 2 Break Point Rationale ............................................................................................ 36

Revised Tier Structure ...................................................................................................... 37

USAGE UNDER PROPOSED TIERS .........................................................................37

6. WATER COST OF SERVICE ANALYSIS ........................................... 39

COST OF SERVICE PROCESS .................................................................................39

COST OF SERVICE ANALYSIS ................................................................................39

Determination of Revenue Requirement ........................................................................ 39

Allocation of Functionalized Costs to Cost Causation Components .......................... 42

Peaking Allocation ............................................................................................................ 43

Peaking Factors by Customer Class ............................................................................... 44

Allocation of Operating Expenses................................................................................... 45

Functionalization of O&M Costs ...................................................................................... 46

Allocation of Capital Costs .............................................................................................. 46

Determination of Unit Cost Process ............................................................................... 47

Determination of Equivalent Meter Units and Customers ............................................ 48

Determination of Max Day and Max Hour Extra Capacity Units ........................... 48

Allocation of General Costs, Public Fire Protection Costs, and Peaking Costs 49

Determination of Unit Cost ....................................................................................... 50

Allocation of Costs to Customer Class ................................................................... 50

Comparison of Cost Allocation to Customer Class .............................................. 52

FIXED VS. VARIABLE REVENUE SPLIT ..................................................................53

7. RATE DESIGN AND CUSTOMER IMPACTS ..................................... 54

DEVELOPMENT OF MONTHLY FIXED CHARGE .....................................................54

PROPOSED MONTHLY FIXED CHARGES FOR STUDY PERIOD ...........................54

DEVELOPMENT OF VOLUMETRIC RATES .............................................................55

PROPOSED VOLUMETRIC CHARGES FOR STUDY PERIOD .................................56

SINGLE FAMILY RESIDENTIAL BILL IMPACTS ......................................................57

8. CONCLUSION .................................................................................... 59

Water Financial Plan and Cost of Service Study 5

LIST OF TABLES

Table 1-1: Revenue Adjustments for Water Enterprise _________________________________________________ 9

Table 1-2: Distribution of Functionalized O&M Costs _________________________________________________ 12

Table 1-3: Current SFR Tier Structure ______________________________________________________________ 12

Table 1-4: Proposed SFR Tier Structure ____________________________________________________________ 12

Table 1-5: Variable Rate Component ______________________________________________________________ 13

Table 1-6: Proposed Monthly Fixed Charge _________________________________________________________ 13

Table 1-7: Fixed vs. Variable Revenue _____________________________________________________________ 14

Table 1-8: Fixed vs. Variable Costs ________________________________________________________________ 14

Table 3-1: Inflation Factor Assumptions ____________________________________________________________ 20

Table 3-2: Account Growth Rates by Customer Class _________________________________________________ 20

Table 3-3: Projected Annual Water Demand ________________________________________________________ 21

Table 3-4: Replacement Cost of Critical Water Assets _________________________________________________ 22

Table 3-5: Recommended Water Reserves __________________________________________________________ 23

Table 3-6: Reserve Targets for Study Period _________________________________________________________ 23

Table 4-1: Current Monthly Fixed Charges __________________________________________________________ 24

Table 4-2: Current Volumetric Rates _______________________________________________________________ 25

Table 4-3: Projected Account Totals by Meter Size ___________________________________________________ 25

Table 4-4: Projected Water Usage by Tier and Customer Class __________________________________________ 26

Table 4-5: Revenues from Current Rates ___________________________________________________________ 27

Table 4-6: Projected Miscellaneous Revenue ________________________________________________________ 27

Table 4-7: Projected Water Supply Costs ___________________________________________________________ 28

Table 4-8: Projected O&M Costs __________________________________________________________________ 29

Table 4-9: Status Quo Financial Plan Pro-Forma _____________________________________________________ 31

Table 4-10: Proposed Revenue Adjustments ________________________________________________________ 32

Table 4-11: Proposed Financial Plan Pro-Forma _____________________________________________________ 33

Table 5-1: Current Tier Structure _________________________________________________________________ 35

Table 5-2: Revised Tier Structure _________________________________________________________________ 37

Table 5-3: Usage by Customer Class and Tier (HCF) ___________________________________________________ 38

Table 6-1: Cost of Service Revenue Requirements ____________________________________________________ 41

Table 6-2: System Peaking Factors ________________________________________________________________ 43

Table 6-3: Max Day/Max Hour Facility Allocation Factors _____________________________________________ 44

Table 6-4: Customer Class Peaking Factors _________________________________________________________ 45

Table 6-5: Functional Cost Allocation to Cost Categories ______________________________________________ 45

Table 6-6: Distribution of Functionalized O&M Costs _________________________________________________ 46

Table 6-7: Capital Allocation to Cost Categories _____________________________________________________ 47

Table 6-8: Equivalent Meter Unit Calculation _______________________________________________________ 48

Table 6-9: Determination of Extra Capacity Units ____________________________________________________ 49

Table 6-10: Allocation of General, Fire, and Peaking Costs _____________________________________________ 49

Table 6-11: Determination of Unit Cost ____________________________________________________________ 50

Table 6-12: Allocation of Costs to Customer Class ____________________________________________________ 50

Table 6-13: Total Cost Allocation to Customer Class and Tier ___________________________________________ 52

Table 6-14: Comparison of Proposed and Current Cost Allocation to Customer Classes ______________________ 52

Table 6-15: Fixed vs. Variable Revenue ____________________________________________________________ 53

Table 6-16: Fixed vs. Variable Costs _______________________________________________________________ 53


Table 7-1: Development of Monthly Fixed Charge ____________________________________________________ 54

Table 7-2: Proposed Monthly Fixed Charges for Study Period ___________________________________________ 54

Table 7-3: Development of Volumetric Rates ________________________________________________________ 56

Table 7-4: Proposed Volumetric Charges for FY 2016 and FY 2017 _______________________________________ 57

LIST OF FIGURES

Figure 1-1: Operating Financial Plan ______________________________________________________________ 10

Figure 1-2: Capital Improvement Program Funding __________________________________________________ 10

Figure 1-3: Projected Ending Fund Balance _________________________________________________________ 11

Figure 4-1: Programmed 5-Year Water Capital Expenditures ___________________________________________ 30

Figure 4-2: Proposed Operating Financial Plan ______________________________________________________ 34

Figure 4-3: Ending Balance for Water Fund under Proposed Financial Plan ________________________________ 34

Figure 7-1: Residential Bill Total Comparison of Current vs. Proposed Rates (5/8” meter) ____________________ 58

GLOSSARY

Terms Descriptions

AF Acre foot / Acre feet, 1 AF = 435.6 HCF

AWWA American Water Works Association

CIP Capital Improvement Projects

Calleguas Calleguas Municipal Water District

COS Cost of Service

CPI Consumer Price Index/Indices

CUWCC California Urban Conservation Council

CY Calendar Year

EMU Equivalent Meter Unit

ENR CCI Engineering News Records Construction Cost Indices

FY Fiscal Year (July 1 – June 30)

GPCD Gallons per capita per day

HCF Hundred cubic feet or 100 cubic feet, 1 HCF = 748 gallons

M1 Manual “Principles of Water Rates, Fees, and Charges: Manual of Water Supply Practices M1" published by AWWA

MD Max Day Peaking Factor

MFR Multi-Family Residential

MH Max Hour Peaking Factor

NPV Desalter North Pleasant Valley Regional Desalter Project

O&M Operations and Maintenance

PAYGO Pay-As-You-Go

R&R Refurbishment and Replacement

RFC Raftelis Financial Consultants, Inc.

SFR Single Family Residential


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1. EXECUTIVE SUMMARY

STUDY BACKGROUND

In 2012, the City of Thousand Oaks engaged Raftelis Financial Consultants (RFC) to conduct a Water

Financial Plan to develop a sustainable reserve policy and a sustainable financial plan for the Water

Enterprise and to establish rates that generate sufficient revenue to meet operational and capital needs.

RFC completed the initial Financial Plan in 2013. In 2015, the City retained RFC to update the Financial

Plan, perform a cost of service study, and develop equitable rates which comply with the requirements of

Proposition 218. The City’s most recent cost of service (COS) study was performed in2011.

The City’s Water Enterprise is operating in an environment where revenues from rates are outpaced by

operating expenditures, costs to maintain existing infrastructure, and water supply costs. In addition, the

City has been assigned a mandatory water usage cutback factor of 28 percent1 due to the State’s current

drought conditions.

For the Water Enterprise, the increase in imported water supply costs as supplied by Calleguas Municipal

Water District (Calleguas) represents the most significant pressure on net revenues. Additionally, there

are several significant capital Replacement and Refurbishment (R&R) projects programmed, particularly

the storage and reservoir improvements. The City has instructed RFC to propose the level of water rates

needed for financial sustainability. In addition, RFC incorporated into the financial plan model the ability

to pass through the increased costs of imported water supply to the City’s customers, in accordance with

AB 3030 and other regulations. RFC recommends that the City continue to make use of the pass-through

provision for the Study period (FY2 2016 to FY 2020) as a means to mitigate the financial risk associated

with the uncertainty in water supply costs.

This report presents the financial plan and rates over a five year period – however rates are reviewed and

adopted in two year cycles by the City.

OBJECTIVES OF THE STUDY

The major objectives of the Study include the following:

1. Develop financial plans and propose revenue adjustments for the Water Enterprise to ensure

financial sustainability, by meeting operation and maintenance (O&M) costs, ensuring sufficient

funding of City financial reserves, and funding capital repair and replacement (R&R). In addition,

the analysis contained in this Report make assumptions regarding future water usage and ensures

that the City is financially prepared for a period of reduced sales;

2. Conduct a cost-of-service (COS) analysis for the water system;

1 Calendar Year 2013 is used as the baseline year for the mandatory 28 percent water usage cutback. 2 Fiscal Year (July 1 – June 30)


3. Develop fair and equitable water rates compliant with the requirements of Proposition 218, that

adequately recover costs, provide revenue stability for recovering fixed costs, and maintain

affordable water service

RESULTS AND RECOMMENDATIONS

Proposed Financial Plan

Table 1-1 shows the proposed revenue adjustments for the Water Enterprise for the next five fiscal years.

The revenue adjustments for water include needed revenue to fund approximately $25 million of annual

operational costs and nearly $23 million of programmed capital improvements over the five year Study

period. It is important to note that the revenue adjustments shown below do not include any potential

pass-through costs as a result of increased water supply costs from Calleguas Municipal Water District,

expected to add 4 to 5 percent adjustment per year

Table 1-1: Revenue Adjustments for Water Enterprise

Enterprise Revenue Adjustments

5-Year CIP FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Water 3% 3% 1% 0% 0% $22.7M

Factors Affecting Revenue Adjustments

The following items affect the Water Enterprise’s revenue requirement (i.e. costs) and thus its water rates.

The City’s costs include Operation and Maintenance (O&M) expenses and capital expenditures.

» Capital Funding of System Improvements: The City’s water distribution infrastructure is

aging and major repairs to its capital infrastructure, valued at $490 million, are required.

» Reserve Funding: The Water Enterprise has an operating, emergency, and a capital reserve – collectively amounting to $15.5M in funds that must be set aside.

» Mandatory Conservation: On April 1, 2015 Governor Brown issued Executive Order B-29-15 directing the State Water Resources Control Council (SWRCB) to work with water service providers to reduce urban potable use by 25% statewide. The City is required to reduce usage by 28% through February 2016, compared to CY 2013 usage. The reduced sales result in lower revenues and may impact long term financial stability.

Figure 1-1 illustrates the operating position of the Water Enterprise, where the expenses and reserve

funding are shown by stacked bars and total revenues at current rates and proposed rates are shown by

red and green lines, respectively. Under the proposed rate adjustments shown in Table 1-1, the Water

Enterprise will be able to contribute more to reserves, which are required to fund capital needs and to

maintain healthy reserve operational and emergency levels. Under the current rates, the reserves are not

adequate to cover capital expenditures while maintaining minimum reserve targets.


Figure 1-1: Operating Financial Plan

Figure 1-2 summarizes the projected CIP and Asset R&R expenditures, which have an average CIP

expenditure of $4.5M for the 5-year planning horizon. The proposed capital improvement plan will be

funded entirely through rate revenues (Pay As You Go or PAYGO) and reserves.

Figure 1-2: Capital Improvement Program Funding

The unrestricted reserves (ending fund balance) for the Water Enterprise includes the beginning balance

plus net cash changes for the year. The ending fund balance for the Water Enterprise is projected and

shown in Figure 1-3, where the red line indicates the target reserve balance as recommended by the

reserve funding levels discussed in Section 3.3.


Figure 1-3: Projected Ending Fund Balance

Functionalization of Costs

The annual cost of providing water service is distributed among customer classes commensurate with

their service requirements. A COS analysis involves the following:

1. Functionalization of costs. Examples of functions are supply, treatment, transmission,

distribution, storage, meter servicing, and customer billing and collection.

2. Allocate functionalized costs to cost causation components. Cost causation components include

base, maximum day, maximum hour3, conservation, public fire protection, meter service, and

customer servicing and billing costs.

3. Distribute the cost causation components. Distribute cost components, using unit costs, to

customer classes in proportion to their demands on the water system.

Table 1-2 shows the functionalized costs and how each is assigned to the COS component. Each function

is assigned to the fixed monthly charge, the per unit variable charge, or both.

3 Collectively maximum day and maximum hour costs are known as peaking costs or capacity costs.


Table 1-2: Distribution of Functionalized O&M Costs

Line No. Cost Components Cost of Service Fixed Volumetric

1 Supply $15,983,887

2 Base $2,513,271

3 Max Day $1,466,409

4 Max Hour $733,204

5 Fire $693,438

6 Conservation $132,805

7 Pumping $705,289

8 Meter $302,359

9 Customer $575,164

10 General $1,334,318

11 Total O&M $24,440,143

Proposed Rate Structure

The City wishes to implement a new tier structure for single family residential (SFR) users that is reflective

of current usage trends and is compliant with Proposition 218. The revised rate structure is proposed to

be implemented with new rates in May 2016. The uniform commodity rate for all non-SFR users is

proposed to remain in place. The current and proposed tier structures for SFR customers are shown in

Table 1-3 and Table 1-4, respectively. For the proposed tier structure, the tier break between tiers 1 and

2 is based on the average SFR customer’s average winter month use of 12 hcf (based on calendar year

2013 data). The tier break between tiers 2 and 3 is based on efficient irrigation of 4,356 square feet of

irrigable area, which is based on the estimated average lot size in the City’s service area.

Table 1-3: Current SFR Tier Structure

Current Tier Definitions

Customer Class Beginning End Width

SFR

Tier 1 0 15 15 hcf

Tier 2 16 35 20 hcf

Tier 3 36 ∞

Table 1-4: Proposed SFR Tier Structure

Proposed Tier Definitions

Customer Class Beginning End Width Rationale

SFR

Tier 1 0 12 12 hcf Based on average winter month use (CY 2013) of 12 hcf

Tier 2 13 30 18 hcf Based on efficient irrigation of 4,356 sq. ft.

Tier 3 31 ∞


Proposed Variable and Fixed Rates

After the cost components from Table 1-2 have been properly allocated to each customer class, the

addition of these cost components produces a total rate. The per unit cost component and resulting rate

for each customer class and tier is shown below in Table 1-5.

Table 1-5: Variable Rate Component

Rate Class Monthly Tier (hcf)

Supply Base Peaking Conservat

ion Pumping Pass Thru Total Rate

Current Rate

Change (%)

Single Family Residential

Tier 1 0 - 12 $3.11 $0.83 $0.16 $0.03 $0.11 $4.25 $4.22 1%

Tier 2 13 - 30 $3.11 $0.83 $0.47 $0.03 $0.11 $4.56 $4.51 1%

Tier 3 31+ $3.11 $0.83 $0.86 $0.03 $0.11 $4.95 $4.81 3%

MFR $3.11 $0.83 $0.50 $0.03 $0.11 $4.58 $4.57 0%

Commercial $3.11 $0.83 $0.50 $0.03 $0.11 $4.58 $4.57 0%

Irrigation $3.11 $0.83 $0.50 $0.03 $0.11 $4.58 $4.57 0%

Pumping $0.18 $0.18 $0.16 13%

Table 1-6 shows the current and proposed monthly fixed charges by meter size. The charges are based

upon modified American Water Works Association (AWWA) hydraulic capacity ratios from the “Sizing

Water Service Lines and Meters M22” (“the Manual M22”). Note that the customer component of the rate

is the same regardless of meter size, whereas the meter portion increases proportionally to the AWWA

meter ratio.

Table 1-6: Proposed Monthly Fixed Charge

A B C D = B + C

Meter Size Meter Ratio Meter Customer Proposed Charges Current Charges Change (%)

5/8 1.00 $21.11 $3.21 $24.32 $18.19 34%

1 1.67 $35.18 $3.21 $38.40 $33.11 16%

1 1/2 3.33 $70.37 $3.21 $73.58 $62.76 17%

2 5.33 $112.59 $3.21 $115.80 $102.57 13%

3 11.67 $246.28 $3.21 $249.50 $199.96 25%

4 21.00 $443.31 $3.21 $446.52 $302.28 48%

6 43.33 $914.76 $3.21 $917.97 $671.87 37%

To achieve the City’s goal of rate stability, a greater portion of the peaking costs were assigned to meter

(fixed charges). Shifting a greater portion of the Water Enterprise’s revenue to the fixed meter charge

reduced revenue and rate volatility and better aligns fixed costs with fixed revenues. As a result, the fixed

revenue increases from 16% to 20% under the proposed cost-of-service based rates. A summary is

provided in Table 1-7 below.


Table 1-7: Fixed vs. Variable Revenue

Fixed Variable Total

Current $4,685,205 $23,541,187 $28,226,392

16% 84% 100%

Proposed $5,924,233 $23,337,005 $29,261,238

20% 80% 100%

The proposed fixed and variable revenues shown above are better aligned with the Water Enterprise’s

fixed and variable costs, which are displayed in Table 1-8 below. Per the recommendation of the California

Urban Water Conservation Council, it is recommended that the City maintain its fixed revenue under 30%

so as to maintain a conservation pricing signal.

Table 1-8: Fixed vs. Variable Costs

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Variable Costs (%) 61% 63% 64% 64% 63%

Fixed Costs (%) 39% 37% 36% 36% 37%


2. INTRODUCTION

STUDY BACKGROUND

In 2012, the City of Thousand Oaks engaged Raftelis Financial Consultants (RFC) to conduct a Water

Financial Plan to develop a sustainable reserve policy and a sustainable financial plan for the Water

Enterprise and to establish rates that generate sufficient revenue to meet operational and capital needs.

RFC completed the initial Financial Plan in 2013. In 2015, the City retained RFC to update the Financial

Plan, perform a cost of service study, and develop equitable rates which comply with the requirements of

Proposition 218. The City’s most recent cost of service (COS) study was performed in2011.

The City’s Water Enterprise is operating in an environment where revenues from rates are outpaced by

operating expenditures, costs to maintain existing infrastructure, and water supply costs. In addition, the

City has been assigned a mandatory water usage cutback factor of 28 percent4 through February 2016

due to the State’s current drought conditions.

For the Water Enterprise, the increase in imported water supply costs as supplied by Calleguas Municipal

Water District (Calleguas) represents the most significant pressure on net revenues. Additionally, there

are several significant capital Replacement and Refurbishment (R&R) projects programmed, particularly

the storage and reservoir improvements. The City has instructed RFC to propose the level of water rates

needed for financial sustainability for the projected operating and capital expenditures and other financial

obligations. In addition, RFC incorporated into the financial plan model the ability to pass through the

increased costs of imported water supply to the City’s customers, in accordance with AB 3030 and other

regulations. RFC recommends that the City continue to make use of the pass-through provision for the

Study period as a means to mitigate the financial risk associated with the uncertainty in water supply

costs.

This report presents the financial plan and rates over a five year period – however rates are reviewed and

adopted in two year cycles by the City.

OBJECTIVES OF THE STUDY

The major objectives of the Study include the following:

1. Develop financial plans and propose revenue adjustments for the Water Enterprise to ensure

financial sustainability, by meeting operation and maintenance (O&M) costs, ensuring sufficient

funding of City financial reserves, and funding capital replacement and refurbishment (R&R). In

addition, the analyses contained in this Report make assumptions regarding future water usage

and ensures that the City is financially prepared for a period of reduced sales;

2. Conduct a cost-of-service analysis for the water system;

4 Calendar Year 2013 is used as the baseline year for the mandatory 28 percent water usage cutback.


3. Develop fair and equitable water rates compliant with the requirements of Proposition 218, that

adequately recover costs, provide revenue stability for recovering fixed costs, and maintain

affordable water service

PROCESS

This report was prepared using the principles established by the American Water Works Association

(AWWA). The AWWA “Principles of Water Rates, Fees, and Charges: Manual of Water Supply Practices

M1 (the “M1 Manual”) establishes commonly accepted professional standards for cost of service studies.

The M1 Manual general principles of rate structure design and the objectives of the Study are described

below.

According to the M1 Manual, the first step in the ratemaking analysis is to determine the adequate and

appropriate level of funding for a given utility. This is referred to as determining the “revenue

requirements”. This analysis considers the short-term and long-term service objectives of the utility over

a given planning horizon, including capital facilities, system operations and maintenance, and financial

reserve policies to determine the adequacy of a utility’s existing rates to recover its costs. A number of

factors may affect these projections, including the number of customers served, water-use trends,

nonrecurring sales, weather, conservation, use restrictions, inflation, interest rates, wholesale contracts,

capital finance needs, changes in tax laws, and other changes in operating and economic conditions.

After determining a utility’s revenue requirements, the next step is determining the cost of service.

Utilizing a public agency’s approved budget, financial reports, operating data, and capital improvement

plans, a rate study generally categorizes (functionalizes) the system costs (e.g., treatment, storage,

pumping, etc.), including operating and maintenance and asset costs, among major operating functions

to determine the cost of service.

After the assets and the costs of operating those assets are properly categorized by function, these

“functionalized costs” are allocated first to cost causation components, and then to the various customer

classes (e.g., single-family residential, multi-family residential, irrigation, and commercial) by determining

the characteristics of those classes and the contribution of each to incurred costs such as base costs,

peaking costs, delivery costs, service characteristics, and demand patterns.

Rate design is the final element of the rate-making procedure and uses the revenue requirement and cost

of service analysis to determine rates for each customer class that reflect the cost of providing service to

those customers. Rates utilize “rate components” that build-up to commodity rates, and fixed charge

rates, for the various customer classes and meter sizes servicing customers. In the case of tiered rates,

the rate components themselves allocate the cost of service within each class of customer, effectively

treating each tier as a sub-class and determining the cost to serve each tier.


LEGAL REQUIREMENTS AND RATE SETTING METHODOLOGY

California Constitution - Article XIII D, Section 6 (Proposition 218)

Proposition 218, reflected in the California Constitution as Article XIII D, was enacted in 1996 to ensure

that rates and fees are reasonable and proportional to the cost of providing service. The principal

requirements for fairness of the fees, as they relate to public water service are as follows:

1. A property-related charge (such as water and wastewater rates) imposed by a public agency on

a parcel shall not exceed the costs required to provide the property related service.

2. Revenues derived by the charge shall not be used for any purpose other than that for which the

charge was imposed.

3. The amount of the charge imposed upon any parcel shall not exceed the proportional cost of

service attributable to the parcel.

4. No charge may be imposed for a service unless that service is actually used or immediately

available to the owner of property.

5. A written notice of the proposed charge shall be mailed to the record owner of each parcel at

least 45 days prior to the public hearing, when the agency considers all written protests against

the charge.

As stated in AWWA’s M1 Manual, “water rates and charges should be recovered from classes of

customers in proportion to the cost of serving those customers.” Prop 218 requires that water rates

cannot be “arbitrary and capricious,” meaning that the rate-setting methodology must be sound and that

there must be a nexus between the costs and the rates charged. RFC follows industry standard rate setting

methodologies set forth by the AWWA M1 Manual to ensure this study meets Proposition 218

requirements and develops rates that do not exceed the proportionate cost of providing water services.

California Constitution - Article X, Section 2

Article X, Section 2 of the California Constitution (established in 1976) states the following:

“It is hereby declared that because of the conditions prevailing in this State the general welfare requires

that the water resources of the State be put to beneficial use to the fullest extent of which they are

capable, and that the waste or unreasonable use or unreasonable method of use of water be prevented,

and that the conservation of such waters is to be exercised with a view to the reasonable and beneficial

use thereof in the interest of the people and for the public welfare.”

Article X, section 2 of the State Constitution institutes the need to preserve the State’s water supplies and

to discourage the wasteful or unreasonable use of water by encouraging conservation. As such, public

agencies are constitutionally mandated to maximize the beneficial use of water, prevent waste, and

encourage conservation.

In addition, Section 106 of the Water Code declares that the highest priority use of water is for domestic

purposes, with irrigation secondary. To meet the objectives of Article X, section 2, Water Code Section

375 et seq., a water purveyor may utilize its water rate design to incentivize the efficient use of water.

The City wishes to establish budget based (also known as allocation based) water rates to incentivize


customers to use water as wisely as possible, while based on the proportionate costs incurred to provide

water to customer classes to achieve compliance with Proposition 218.

Tiered Rates – “Inclining” tier rate structures (synonymous with “tiered” rates) when properly designed

and differentiated by customer class, allow a water utility to send consistent price signals to customers.

Tiered rates meet the requirements of Proposition 218 as long as the tiered rates reasonably reflect the

proportionate cost of providing service to users in each tier.

Cost-Based Rate-Setting Methodology

As stated in the AWWA M1 Manual, “the costs of water rates and charges should be recovered from

classes of customers in proportion to the cost of serving those customers.” To develop utility rates that

comply with Proposition 218 and industry standards while meeting other emerging goals and objectives

of the utility, there are four major steps discussed below and previously addressed in Section 2.3.

Calculate Revenue Requirement

The rate-making process starts by determining the test year (rate setting year) revenue requirement,

which for this study is fiscal year ending (FYE) 2016. The revenue requirement should sufficiently fund

the utility’s O&M, debt service, capital expenses, and reserves.

Cost Of Service Analysis (COS)

The annual cost of providing water service is distributed among customer classes commensurate with

their service requirements. A COS analysis involves the following:

1. Functionalize costs. Examples of functions are supply, treatment, transmission, distribution,

storage, meter servicing, and customer billing and collection.

2. Allocate functionalized costs to cost causation components. Cost causation components include

base, maximum day, maximum hour5, conservation, public fire protection, meter service, and

customer servicing and billing costs.

3. Distribute the cost causation components. Distribute cost components, using unit costs, to

customer classes in proportion to their demands on the water system. This is described in the

M1 Manual published by AWWA.

A COS analysis considers both the average quantity of water consumed (base costs) and the peak rate at

which it is consumed (peaking or capacity costs as identified by maximum day and maximum hour

demands).6 Peaking costs are costs that are incurred during peak times of consumption. There are

additional costs associated with designing, constructing, and operating and maintaining facilities to meet

peak demands. These peak demand costs need to be allocated to those imposing such costs on the utility.

In other words, not all customer classes share the same responsibility for peaking related costs.

5 Collectively maximum day and maximum hour costs are known as peaking costs or capacity costs. 6 System capacity is the system’s ability to supply water to all delivery points at the time when demanded. Coincident peaking factors are calculated for each customer class at the time of greatest system demand. The time of greatest demand is known as peak demand. Both the operating costs and capital asset related costs incurred to accommodate the peak flows are generally allocated to each customer class based upon the class’s relative demands during the peak month, day, and hour event.


Rate Design and Calculations

Rates do more than simply recover costs. Within the legal framework and industry standards, properly

designed rates should support and optimize a blend of various utility objectives, such as deterring water

waste, affordability for essential needs, and revenue stability among other objectives. Rates may also act

as a public information tool in communicating these objectives to customers.

Rate Adoption

Rate adoption is the last step of the rate-making process to comply with Proposition 218. RFC documents

the rate study results in this Study Report to act as an administrative record for the City and a public

education tool about the proposed changes, the rationale and justifications behind the changes, and their

anticipated financial impacts in lay terms.


3. GENERAL ASSUMPTIONS

INFLATION

The Study period is for Fiscal Years FY 20167 to FY 2020. Various types of assumptions and inputs were

incorporated into the Study based on discussions with and/or direction from City staff. These include the

projected number of accounts and annual growth rates in consumption for different customer classes,

inflation factors, and other assumptions.

The inflation factor assumptions are presented in Table 3-1, below. FY 2016 was the baseline year for all

budgeted expenses, and therefore, does not require an inflation factor to project costs. The Water Costs

line item refers to the cost of purchased water from Calleguas, which is the City’s only source of potable

water.

Table 3-1: Inflation Factor Assumptions

INFLATION FACTORS FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

General 3% 3% 3% 3%

Salary 3% 3% 3% 3%

Benefits 3% 3% 3% 3%

Capital 2% 2% 2% 2%

Energy 5% 5% 5% 5%

Water Costs 5.5% 5.5% 5.5% 5.5%

PROJECTED DEMAND AND GROWTH

Projecting water demand relies on two key variables — the number of accounts and demand per account.

Since the City is nearly built out, it is anticipated that there will be minimal account growth over the Study

period. The growth rate is based on staff estimates using historic trends. The account growth by customer

class is shown in Table 3-2. Growth rates for FY 2016 are included in this projection because the account

totals were based on previous year data.

Table 3-2: Account Growth Rates by Customer Class

CUSTOMER CLASS GROWTH RATE

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

SFR 0.06% 0.06% 0.06% 0.06% 0.06%

MFR 0.06% 0.06% 0.06% 0.06% 0.06%

Commercial 0.06% 0.06% 0.06% 0.06% 0.06%

Irrigation 0.06% 0.06% 0.06% 0.06% 0.06%

Others 0.00% 0.00% 0.00% 0.00% 0.00%

7 FY 2016: Fiscal Year 2015/2016 (From July 1, 2015 to June 30, 2016)


Given the current drought conditions, many users have curtailed their use to help the City meet its

mandatory 28% cutback. The City anticipates that after the 28% reduction in water consumption in FY

2016 compared to FY 2013, there will be a rebound of about 10 percentage points per year in FY 2017 and

FY 2018. Furthermore, it is expected that water use will stabilize at 91% of the water consumption in FY

2013 for the rest of the projection period due to behavioral changes in water use and more efficient indoor

and outdoor fixtures. The reduced sales result in lower revenues and significantly impact long term

financial stability, which is detailed in subsequent sections. The estimated water demand for each year of

the Study period, shown below in Table 3-3, is based on projections made by RFC with input from City

staff. The City’s success in meeting its mandatory 28% cutback was used as the starting point to determine

the anticipated demand for FY 2016. For FY 2017 and FY 2018 it is anticipated that water usage will

rebound by 10 percentage points each year as drought conditions improve. After FY 2018, water use is

expected to stabilize at 9% below 2013 levels, as stated above. The minor increases in acre foot (AF)

demand in FY 2019 to FY 2020 are due to the account growth shown in Table 3-2.

Table 3-3: Projected Annual Water Demand

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

% of 2013 Sales 72% 82% 91% 91% 91%

AF Demand 8,500 AF 9,790 AF 10,770 AF 10,775 AF 10,780 AF

RESERVE POLICY

A reserve policy is a written document that provides a basis for the City to cope with unanticipated

reductions in revenues, offset fluctuations in costs of providing services, and fiscal emergencies such as

revenue shortfalls, asset failure, and natural disaster. It also provides guidelines for sound financial

management with an overall long-range perspective to maintain financial solvency and mitigate financial

risks associated with revenue instability, volatile capital costs and emergencies. It also sets funds aside for

replacement of capital assets as they age and for new capital projects. Additionally, adopting and

adhering to a sustainable reserve policy enhances financial management transparency and helps achieve

or maintain a certain credit rating for future debt issues.

The appropriate amount of reserves and reserve types are determined by a variety of factors, such as the

size of the operating budget, the amount of debt, the type of rate structure, frequency of customer billing,

and risk of natural disaster. Most reserves tend to fall into the following categories: operations &

maintenance (O&M) cash flow, rate stabilization, capital replacement and refurbishment (R&R), and

emergency.

O&M Cash Flow (Fund 611)

The purpose of an O&M reserve is to provide working capital to support the operation, maintenance and

administration of the utility. From a risk management perspective, the O&M reserve supports the Water

Enterprise’s cash flow needs during normal operations and ensures that operations can continue should

there be significant events that impact cash flows.


RFC recommends that the City maintain 90 days cash (25 percent of annual operating budget) for the

Water Operating Fund to ensure adequate working capital for operating expenses. With the exception of

select commercial accounts, the City bills bi-monthly. The time gap between accounts receivables and

actual cash expenses ranges from 60 to 120 days, warranting higher operational reserves than an agency

that bills monthly. The budgeted O&M expenses for FY 2016 are $20.3M, which translates into $5M for

90 days of cash reserves for the Water Operating Fund.

Capital Emergency (Fund 613)

The purpose of an emergency reserve is to allow the utility to provide uninterrupted service in light of a

fiscal emergency, natural disaster or facility failure. An emergency reserve decreases risk by recognizing

the high capital costs of the facilities and setting aside adequate funds to restart the system after an

unanticipated event or replace an essential facility.

Per a critical-asset analysis provided by GHD, Inc. in its 2013 Asset Management Plan Study, the Wilder

Reservoir is the most critical asset in the system. Typical asset failure scenarios were evaluated and it was

determined that $4M would be needed to replace the Wilder Reservoir. RFC recommends that $4M be

set aside for emergency use. Although this level of emergency reserve is sufficient for now, the reserve

should be re-evaluated periodically as the system ages. A summary of the City’s most critical water assets

is shown below in Table 3-4.

Table 3-4: Replacement Cost of Critical Water Assets8

Location Install Year Size (MGD) Replacement Cost Criticality Score

Wilder Reservoir 1964 1 $4,000,000 7

Rolling Oaks Reservoir 2002 0.35 $1,250,000 6

Grissom Reservoir #1 1987 0.2 $1,000,000 4.5

Grissom Reservoir #2 1981 0.22 $1,000,000 4.5

Willow Lane Reservoir 1983 5 $15,000,000 4.2

Recommended Target $ 4,000,000

Capital R&R (Fund 613)

Capital R&R reserves are used to fund future obligations that are necessary for maintaining a reliable

infrastructure. Because water utilities are highly capital-intensive enterprises, it is important to accurately

estimate long-term R&R costs and develop a reserve to fund the eventual replacement of the system and

new capital projects.

The total asset value for the Water Enterprise was estimated at $125.4M at the beginning of FY 2016.

Based on discussions with Staff, the capital R&R reserve was set at 5% of the replacement value of

water-related assets. For FY 2016, the capital R&R reserve requirement is $6.3M.

8 Provided by GHD based on Asset Management Plan Study which was conducted concurrently with the previous Financial Plan Study in 2013


Proposed Water Reserves

Table 3-5 summarizes the recommended reserve policy for Water Funds for adequate operating working

capital, emergency use, and working capital for future R&R projects.

Table 3-5: Recommended Water Reserves

Reserve Recommended Policy 2016 Target Level Fund 611 – Water Operating Fund

Operating 25% of Operating Budget $5.0M

Fund 613 – Water Capital Fund

Emergency Replacement cost of Wilder Reservoir (most critical asset) $4.0M

Capital R&R 5% of Asset Value $6.3M

Total Water Fund 271 days of cash (A Rating) $15.3M

Applying the same methodology for determining the reserve target levels to all years of the Study period

yield the following targets, found in Table 3-6 below.

Table 3-6: Reserve Targets for Study Period

Reserve FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Operating $5,048,575 $5,690,744 $6,107,152 $6,192,781 $6,280,523

Emergency $4,000,000 $4,080,000 $4,161,600 $4,244,832 $4,329,729

Capital R&R $6,266,012 $6,391,333 $6,519,159 $6,649,543 $6,782,533

Total Target $15,314,587 $16,162,077 $16,787,911 $17,087,156 $17,392,785


4. WATER SYSTEM FINANCIAL PLAN

A review of a utility’s revenue requirements is a key first step in the rate design process. The review

involves an analysis of annual operating revenues under the current rates, operation and maintenance

(O&M) expenses, capital expenditures, transfers between funds, and reserve requirements. This section

of the report provides a discussion of the projected revenues, O&M and capital expenditures, capital

improvement financing plan, and revenue adjustments required to ensure the fiscal sustainability of the

Water Enterprise.

REVENUES FROM CURRENT WATER RATES

The current rates were last adjusted in January 2015. The City’s water service charges have two

components – a monthly fixed charge and a volumetric usage charge. In addition, most customers are

subject to a volumetric pumping charge.

Table 4-1 summarizes the current monthly fixed charges by meter size. The multi-family residential (MFR)

customer class has a higher monthly fixed charge for the 5/8” and 1” meter sizes; these meters typically

serve more than one account.

Table 4-1: Current Monthly Fixed Charges

Meter Size Single Unit Rate Multiple Unit Rate9

5/8 $18.19 $37.99

1 $33.11 $49.66

1 1/2 $62.76 $62.76

2 $102.57 $102.57

3 $199.96 $199.96

4 $302.28 $302.28

6 $671.87 $671.87

In addition to the fixed monthly charge, customers also pay volumetric use charges. Single family

residential (SFR) customers are charged on an inclining three-tier rate structure. All other users are

charged on a simple uniform commodity rate. Customers subject to pumping charges pay a uniform rate

of $0.16 per unit. The volumetric charges for all customer classes is shown below in Table 4-2.

9 Per Ordinance No. 1603-NS – Section IV, the Multiple Units rate applies to all multiple family dwellings, apartments, commercial buildings, and trailer courts.


Table 4-2: Current Volumetric Rates

Single Family Residential (SFR) Pumping/hcf

Tier 1 0 - 15 hcf $4.22 $0.16

Tier 2 16 – 35 hcf $4.51 $0.16

Tier 3 + 35 hcf $4.81 $0.16

Non-SFR

MFR uniform $4.57 $0.16

Commercial uniform $4.57 $0.16

Irrigation uniform $4.57 $0.16

Using the account growth percentages in Table 3-2, the number of accounts in each customer class was

projected for the Study period. Multiple Unit customers are shown separately because they have a

different monthly fixed charge for the 3/4” and 1” meter sizes.

Table 4-3: Projected Account Totals by Meter Size

Meter Size FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Single Units

5/8 14,962 14,971 14,980 14,989 14,997

1 742 743 743 744 744

1 1/2 10 10 10 10 10

2 1 1 1 1 1

3 0 0 0 0 0

4 0 0 0 0 0

6 0 0 0 0 0

Multiple Units

5/8 287 287 288 288 288

1 247 247 247 248 248

1 1/2 327 327 328 328 328

2 297 297 298 298 298

3 37 37 37 37 37

4 22 22 22 22 22

6 7 7 7 7 7

Total Accounts 16,939 16,949 16,961 16,972 16,980

The projected potable water sales developed by RFC and City staff from Table 3-3 were used to project

potable water usage in each tier and customer class. The projected water sales by customer class and tier

for every year of the Study period is shown in Table 4-4 on the next page. In addition, the number of units

subject to lift charges (an additional charge to deliver water in elevated areas) are shown in the final line

of Table 4-4.


Table 4-4: Projected Water Usage by Tier and Customer Class

Water Usage (hcf) FY 2016 FY 2017 FY 2018 FY 2019 FY 2020


Tier 1 1,567,725 1,803,965 1,985,529 1,986,697 1,987,865

Tier 2 719,128 827,493 910,778 911,314 911,850

Tier 3 250,931 288,744 317,805 317,992 318,179

Subtotal SFR 2,537,784 2,920,202 3,214,113 3,216,003 3,217,893

Non-SFR

MFR 257,817 296,667 326,526 326,718 326,910

Commercial 406,468 467,719 514,794 515,097 515,399

Irrigation 501,844 577,467 635,588 635,961 636,335

Subtotal Non-SFR 1,166,129 1,341,853 1,476,907 1,477,776 1,478,644

Total Water Usage (hcf) 3,703,913 4,262,056 4,691,020 4,693,779 4,696,537

Total Water Usage (AF) 8,500 9,790 10,770 10,775 10,782

Subject to Lift Charges (hcf) 3,465,000 3,984,750 4,383,225 4,383,225 4,383,225

Table 4-5 shows the projected revenues for the Study period under the existing rates. The commodity

revenues shown for FY 2016 through FY 2020 are calculated by multiplying the projected usage by the FY

2015 rate. For example, the commodity charge revenue from Tier 1 usage for FY 2016 can be calculated

as follows:

𝑃𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑 𝑇𝑖𝑒𝑟 1 𝑈𝑠𝑎𝑔𝑒 𝑓𝑜𝑟 𝐹𝑌 2016 × 𝑇𝑖𝑒𝑟 1 𝑅𝑎𝑡𝑒

1,567,725 × $4.22 = $6.62𝑀

The same calculation is repeated for all tiers and the other customer classes to determine the total

commodity revenue for each year of the Study period. For FY 2016, the projected volumetric rate revenue

is $16.39M, exclusive of pumping charge revenue.

The monthly fixed charge revenue is the fixed portion of the water service charge that increases with

meter size. Referring to the monthly fixed rates and account totals in Table 4-1 and Table 4-3 respectively,

the monthly fixed charge revenue from all single family homes with a 5/8" meter for FY 2016 is calculated

as follows:

𝑓𝑖𝑥𝑒𝑑 𝑐ℎ𝑎𝑟𝑔𝑒 𝑟𝑎𝑡𝑒 × 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 × 12 𝑚𝑜𝑛𝑡ℎ𝑠

$18.19 × 14,962 × 12 = $3.27𝑀

The same calculation is repeated for all meter sizes and then added together to determine the total

monthly fixed charge revenue for all customers. For FY 2016, the projected monthly fixed charge revenue

is $4.68M.

Adding together the volumetric revenue, monthly fixed charge revenue, and the pumping charge revenue

yields the total revenue from current rates.


Table 4-5: Revenues from Current Rates

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Monthly Fixed Charge $4,685,205 $4,688,016 $4,690,774 $4,693,533 $4,696,291

Volumetric Revenue $16,395,255 $18,865,856 $20,764,652 $20,776,863 $20,789,074

Pumping Revenue $554,400 $637,560 $701,316 $701,316 $701,316

Revenue from Current Rates $21,634,860 $24,191,432 $26,156,742 $26,171,712 $26,186,681

Miscellaneous Revenue

In addition to revenue from rates, the Water Enterprise also receives miscellaneous revenues from

different sources such as interest earnings, antennae siting rental revenue, plan check fees and other

operating/non-operating sources. Total miscellaneous revenues for the Study period are shown in Table

4-6. Interest incomes are calculated based on actual cash balances for the water fund. All other

miscellaneous revenue sources are projected to stay stable for the Study period.

Table 4-6: Projected Miscellaneous Revenue

Fund 611 - Operating FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Stand-By (Fire Detectors) $51,900 $51,900 $51,900 $51,900 $51,900

Backflow Prevention $50,100 $50,100 $50,100 $50,100 $50,100

Plan Checking/Filing Fee $16,000 $16,000 $16,000 $16,000 $16,000

Inspection Fees $1,100 $1,100 $1,100 $1,100 $1,100

Rental of City Facilities $25,500 $25,500 $25,500 $25,500 $25,500

Interest Income $150,000 $91,323 $85,592 $84,614 $81,148

Miscellaneous Revenue $208,600 $208,600 $208,600 $208,600 $208,600

Fund 612 – Developer Fees

Plant Investment Fees $380,000 $380,000 $380,000 $380,000 $380,000

Fire Flow Surcharge $23,000 $23,000 $23,000 $23,000 $23,000

Special Facilities Surcharge $0 $0 $0 $0 $0

Installation - Meter $0 $0 $0 $0 $0

Interest Income $60,000 $44,706 $18,489 $7,247 -$2,309

Miscellaneous Revenue $12,000 $12,000 $12,000 $12,000 $12,000

Fund 613 - Capital Facility

Plant Investment Fees $0 $0 $0 $0 $0

Fire Flow Surcharge $0 $0 $0 $0 $0

Special Facilities Surcharge $0 $0 $0 $0 $0

Installation - Meter $0 $0 $0 $0 $0

Interest Income $60,000 $46,892 $36,307 $60,252 $78,982

Miscellaneous Revenue $0 $0 $0 $0 $0

Total Miscellaneous Revenue $1,038,200 $951,121 $908,588 $920,313 $926,021


O&M EXPENSES

Water Supply Costs

The cost of imported water is the Water Enterprise’s largest O&M expense. One of the advantages of

relying primarily on an imported water source is that O&M costs are significantly reduced during periods

of reduced sales, because less water is being purchased from the wholesaler (Calleguas). Table 4-7

summarizes the City’s water supply costs during the Study period. As expected, the total water supply

cost increases each fiscal year as usage rebounds and cost per AF escalates. The imported water supply

costs account for a minimal water loss factor of 2%, as shown in line 2. While 12,000 AF of Calleguas Tier

1 water is available (line 6) before incurring the Tier 2 rate, the City’s demand of 8,673 (line 10) is well

below that threshold. The total water supply costs for FY 2016 are calculated as follows:

(𝑇𝑖𝑒𝑟 1 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 × 𝑇𝑖𝑒𝑟 1 𝑢𝑠𝑎𝑔𝑒) + 𝐹𝑖𝑥𝑒𝑑 𝐶ℎ𝑎𝑟𝑔𝑒𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝑊𝑎𝑡𝑒𝑟 𝑆𝑢𝑝𝑝𝑙𝑦 𝐶𝑜𝑠𝑡𝑠

($1,257 × 8,673 𝐴𝐹) + $1,408,303 = $12,310,358

Table 4-7: Projected Water Supply Costs

Line No.

FY 2016 Budget

FY 2017 Budget

FY 2018 Projected

FY 2019 Projected

FY 2020 Projected

1 Water Consumption (AF) 8,503 9,784 10,769 10,775 10,782

2 Water loss 2.0% 2.0% 2.0% 2.0% 2.0%

3 Total Demand (including loss) 8,673 9,980 10,984 10,991 10,998

4

5 Available Water Supply from Calleguas

6 Tier 1 - Calleguas 12,000 12,000 12,000 12,000 12,000

7 Tier 2 - Calleguas 0 0 0 0 0

8

9 Water Supply Used to Meet Water Consumption including water loss

10 Tier 1 - Calleguas 8,673 9,980 10,984 10,991 10,998

11 Tier 2 - Calleguas 0 0 0 0 0

12

13 Water Supply Costs (with projected increases)

14 Fixed Charges $1,408,303 $1,454,266 $1,523,093 $1,591,327 $1,660,354

15

16 ($ / AF) Effective for FY

17 Tier 1 - Calleguas $1,257 $1,322 $1,411 $1,486 $1,553

18 Tier 2 - Calleguas $1,391 $1,466 $1,547 $1,632 $1,722

19

20 Water Supply Costs (w/ Pass-through) $12,310,358 $14,538,073 $15,934,733 $16,022,433 $16,110,939

21 Water Supply Costs (no Pass-through) $11,902,723 $13,484,128 $14,699,526 $14,707,342 $14,715,158


Water Operating Expenses

Using the City’s FY 2016 and FY 2017 budget values, inflation factors were assigned to each line item10 to

determine future O&M costs for the Water Enterprise. Table 4-8 summarizes budgeted and projected

O&M expenses for the Water Enterprise during the Study period. The Water Supply Costs are taken from

the calculated values in Table 4-7on the previous page. The cost of wholesale water is the largest operating

expense for the water enterprise.

Table 4-8: Projected O&M Costs

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Water Supply Costs $11,902,723 $13,484,128 $14,699,526 $14,707,342 $14,715,158

Pass-through Water Supply Costs $407,635 $1,053,945 $1,235,207 $1,315,091 $1,395,780

Other O&M Costs $7,995,176 $8,598,339 $8,878,512 $9,144,868 $9,419,214

TOTAL O&M EXPENSES $20,305,534 $23,136,412 $24,813,245 $25,167,301 $25,530,152

PROGRAMMED CAPITAL IMPROVEMENT PROJECTS (CIP)

The City has adopted a 5-year capital improvement program through FY 2020 to address future Water

Enterprise needs (Figure 4-1). Based on the Asset Management Plan Study performed by GHD, a 100-year

asset replacement and refurbishment (R&R) plan through FY 2113 was included to address the R&R needs

of existing infrastructure as they come due. Average CIP and R&R revenue needs are approximately $4.5M

per year during the Study period. The proposed plan does not include the North Pleasant Valley (NPV)

Desalter project11, which had planned expenditures of $5M in both FY 2016 and FY 2017; The NPV Desalter

project was included in the previous study. The proposed capital improvement plan will be funded entirely

through rate revenues (Pay As You Go or PAYGO) and reserves. The Water Enterprise currently has no

outstanding debt and the City does not plan to issue any new debt in the next five years.

10 See Table 3-1 for inflation factor assumptions. 11 Per City staff (July 8, 2015), the City will remain a partner in the North Pleasant Valley Desalter Project but without a capital contribution.


Figure 4-1: Programmed 5-Year Water Capital Expenditures

STATUS QUO POTABLE WATER FINANCIAL PLAN

Table 4-9 displays the pro forma of the City’s Water Enterprise under current rates over the Study period.

All projections shown in the table are based upon the City’s current rate structure and do not include any

rate adjustments or pass-through increases on wholesale water costs. The pro-forma incorporates the

data shown in Table 4-5 for revenues from current rates, Table 4-6 for miscellaneous revenues, Table 4-7

for water supply costs, Table 4-8 for O&M expenses and Figure 4-1 for CIP.


Table 4-9: Status Quo Financial Plan Pro-Forma12

Line No. FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

1 REVENUES

2 Revenues from Rates $21,634,859 $24,191,431 $26,156,742 $26,171,712 $26,186,681

3 Revenue Adjustments $0 $0 $0 $0 $0

4 Pass-through Water Supply Costs $407,635 $1,053,945 $1,235,207 $1,315,091 $1,395,780

5 Other Revenues $1,038,200 $951,122 $908,589 $920,313 $926,022

6

7 TOTAL REVENUES $23,080,694 $26,196,498 $28,300,538 $28,407,116 $28,508,483

8

9 O&M EXPENSES

10 Water Supply Costs $11,902,723 $13,484,128 $14,699,526 $14,707,342 $14,715,158


12 Other O&M Costs $7,995,176 $8,598,339 $8,878,512 $9,144,868 $9,419,214

13 TOTAL O&M EXPENSES $20,305,534 $23,136,412 $24,813,245 $25,167,301 $25,530,153

14

15 NET REVENUES $2,775,160 $3,060,087 $3,487,293 $3,239,815 $2,978,331

16

17 CIP and R&R EXPENDITURES $7,842,947 $7,313,400 $2,314,890 $2,668,938 $2,570,776

18 CIP $7,842,947 $7,313,400 $2,314,890 $2,668,938 $2,570,776

19 R&R $0 $0 $0 $0 $0

20 CIP and R&R Projects Funded by $7,842,947 $7,313,400 $2,314,890 $2,668,938 $2,570,776

21 PAYGO $7,842,947 $7,313,400 $2,314,890 $2,668,938 $2,570,776

22 Debt $0 $0 $0 $0 $0

23

24 NET CASH BALANCES -$5,067,787 -$4,253,313 $1,172,403 $570,876 $407,554

25

26 BEGINNING BALANCES $23,359,980 $18,292,193 $14,038,880 $15,211,282 $15,782,159

27 ENDING BALANCES $18,292,193 $14,038,880 $15,211,282 $15,782,159 $16,189,713

28 ENDING BALANCES W/O DEBT PROCEEDS $18,292,193 $14,038,880 $15,211,282 $15,782,159 $16,189,713

29 TARGET BALANCES $15,314,587 $16,162,077 $16,787,911 $17,087,156 $17,392,785

Under the ‘status-quo’ scenario, revenues generated from rates and other miscellaneous revenues are

adequate to sufficiently recover the operating expenses of the Water Enterprise in FY 2016, but fund

balance does not meet target reserve levels (line 29) from FY 2017 onwards, as indicated on line 28 in

Table 4-9 above . Given the extensive projected CIP/R&R expenditures in FY 2016 and FY 2017, the total

water fund balance goes below target reserve levels and is not able to rebound in future years.

Furthermore, the Water Enterprise would not meet debt coverage targets and therefore, would not be in

a position to issue debt, should it need to in the future. As a result, the City is unable to maintain fiscal

sustainability under the current financial plan.

12 Sum of line items may not match totals due to rounding.


RECOMMENDATIONS AND PROPOSED REVENUE ADJUSTMENTS

To ensure that the Water Enterprise will have adequate revenues to fund operating expense and capital

expenditures, RFC recommends the following water revenue adjustments, (Table 4-10) assuming that

future water supply cost increases will automatically be passed through under AB 3030. The revenue

adjustments are scheduled to be implemented in January of each year, with the exception of the FY 2016

revenue adjustment which is scheduled to be implemented in May 2016. The revenue adjustments below

do not include any future pass-through increases as a result of increased imported water costs. Actual

wholesale water supply pass-through costs will be determined annually to align with actual water cost

increases imposed on the City.

Table 4-10: Proposed Revenue Adjustments

Effective Date Proposed Water Revenue Adjustments

May 2016 3 percent

January 2017 3 percent




Proposed Financial Plan

A pro forma of the proposed financial plan is shown in Table 4-11 on the next page. The proposed financial

plan successfully meets the City’s financial needs, exceeding target reserve balances throughout the study

period with the exception of a slight dip below the reserve target for FY 2017. Due to reduced water sales

in FY 2016, the net revenues are $2.83M. However, in future years the net operating revenue climbs once

water usage rebounds and the proposed revenue adjustments are in effect. The Water Enterprise

experiences negative net cash balances for FY 2016 and 2017 as a result of extensive projected CIP/R&R

expenditures, which decreases the total water fund balance for these two years.


Table 4-11: Proposed Financial Plan Pro-Forma

Line No.

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

1 REVENUES

2 Revenues from Rates $21,634,859 $24,191,431 $26,156,742 $26,171,712 $26,186,681

3 Revenue Adjustments $54,087 $1,099,501 $1,731,694 $1,871,513 $1,872,583


5 Other Revenues $1,038,200 $951,663 $920,130 $949,286 $974,000

6

7 TOTAL REVENUES $23,134,781 $27,296,540 $30,043,773 $30,307,602 $30,429,045

8

9 O&M EXPENSES

10 Water Supply Costs $11,902,723 $13,484,128 $14,699,526 $14,707,342 $14,715,158


12 Other O&M Costs $7,995,176 $8,598,339 $8,878,512 $9,144,868 $9,419,214

13

14 TOTAL O&M EXPENSES $20,305,534 $23,136,412 $24,813,245 $25,167,301 $25,530,153

15

16 NET REVENUES $2,829,247 $4,160,128 $5,230,528 $5,140,301 $4,898,893

17

18 CIP and R&R EXPENDITURES $7,842,947 $7,313,400 $2,314,890 $2,668,938 $2,570,776

19 CIP $7,842,947 $7,313,400 $2,314,890 $2,668,938 $2,570,776

20 R&R $0 $0 $0 $0 $0

21 CIP and R&R Projects Funded by $7,842,947 $7,313,400 $2,314,890 $2,668,938 $2,570,776

22 PAYGO $7,842,947 $7,313,400 $2,314,890 $2,668,938 $2,570,776

23 Debt $0 $0 $0 $0 $0

24

25 NET CASH BALANCES -$5,013,700 -$3,153,272 $2,915,638 $2,471,363 $2,328,116

26

27 BEGINNING BALANCES $23,359,980 $18,346,280 $15,193,008 $18,108,646 $20,580,009

28 ENDING BALANCES $18,346,280 $15,193,008 $18,108,646 $20,580,009 $22,908,125

29 ENDING BALANCES W/O DEBT PROCEEDS $18,346,280 $15,193,008 $18,108,646 $20,580,009 $22,908,125

30 TARGET BALANCES $15,314,587 $16,162,077 $16,787,911 $17,087,156 $17,392,785

Figure 4-2 illustrates the operating position of the Water Enterprise, where the expenses and reserve

funding are shown by stacked bars and total revenues at current rates and proposed rates are shown by

red and green lines, respectively.


Figure 4-2: Proposed Operating Financial Plan

The ending fund balance for the Water Enterprise is projected and shown in Figure 4-3, where the red line

indicates the target reserve balance as recommended by the reserve policy discussed in Section 3. Under

the proposed financial plan, the ending fund balance meets the target reserve for all years, with the

exception of FY 2017.

Figure 4-3: Ending Balance for Water Fund under Proposed Financial Plan


5. PROPOSED TIER DEFINITIONS

For its volumetric water usage charges, the City wishes to retain its inclining tier rate structure for SFR

customers and a uniform commodity rate for all non-SFR customers. Tiered Rates, when properly

designed and differentiated by customer class as this Study does, allows a water utility to send consistent

price incentives for conservation to customers. Due to heightened interest in water conservation, tiered

rates have been increasingly favored, especially in relatively water-scarce regions, such as Southern

California.

CURRENT TIER DEFINITIONS

The current tier structure was established in 2009 to promote conservation and maintain affordability for

low volume users. SFR customers are charged for volumetric use on an inclining three-tier rate structure,

where the price per unit increases with each tier level. The current tier structure and width for each

customer class and tier is shown in Table 5-1 below. Non-SFR customers are charged a uniform commodity

rate and are not subject to tiered pricing.

Table 5-1: Current Tier Structure

Customer Class Tier Range (hcf) Tier Width (hcf)


Tier 1 0 - 15 15

Tier 2 16 - 35 20

Tier 3 36+ ∞

MFR uniform ∞

Commercial uniform ∞

Irrigation uniform ∞

PROPOSED TIER DEFINITIONS

One of the City’s goals with regards to the Study was to evaluate the current SFR tier structure and

recommend revisions based on current usage trends. While these goals have not changed, the usage

behavior for all customer classes has changed. As discussed in Section 4, many customers have curtailed

their use in response to the drought conditions.

Tier 1 Break Point Rationale

Tier 1 represents the lowest cost water available to SFR customers and designed to provide an adequate

allotment for household/indoor use. A commonly used method for determining indoor use is analyzing

the average winter use, when there is presumably little or no outdoor water use. Based on CY 2013 usage


data, SFR customers averaged 12 hcf of usage during the January/February billing cycle13. Therefore, RFC

proposes to revise the tier 1 break point from 15 hcf downwards to 12 hcf.

Tier 2 Break Point Rationale

Whereas tier 1 is designed for household/indoor needs, tier 2 is designed to provide an adequate

allotment for outdoor use for the average SFR lot in the City’s service area. Some users may not use all of

their tier 1 allocation for household/indoor needs, and can therefore use their remaining tier 1 allotment

for irrigation purposes.

To determine the adequate allotment for outdoor use, three main variables are used: irrigated landscape

area, weather data, and an evapotranspiration (ET) Adjustment Factor. The irrigated landscape area is

measured as the square footage of irrigated landscape surface on a customer’s property. The weather

data is based on the reference evapotranspiration (ET0), which is the amount of water loss to the

atmosphere over a given time period at given specific atmospheric conditions. ET0 is the amount of water

(in inches of water) needed for a hypothetical reference crop to maintain its health and appearance. These

variables are used in the following formula to determine the outdoor allotment:

(𝐿𝑎𝑛𝑑𝑠𝑐𝑎𝑝𝑒𝑑 𝐴𝑟𝑒𝑎 × 𝐸𝑇0 × 𝐸𝑇𝐴𝐹

1200)

Landscaped Area (in square feet) is the measured irrigable landscape area served by a specific

water meter.

o For the analysis included in this Study, RFC and City staff estimated an average lot size of

14,520 square feet (1/3 of an acre). Of the lot size, it is estimated that 30% of it is

landscaped area. Therefore, the landscaped area is estimated to be 4,356 square feet.

ET0 is measured in inches of water during the billing period based on daily weather data from

the California Irrigation Management Information System (CIMIS) Station 217 in Moorpark. To

provide an adequate water allotment during the warmest months of the year, the three highest

monthly ET0 are averaged together for use in the formula. The average ET0 for the months of

June through August is 6.3414.

ETAF is a State-legislated efficiency standard in the form of a coefficient that adjusts the outdoor

water budget value based on the crop types and irrigation efficiency:

o ETAF = 80% for single family accounts15

Applying these value to the formula above, yields a total of 18 units.

13 The City opted to use CY 2013 billing data as this is more representative of future demand. Using more current usage data would have produced more restrictive tiers and/or rates and may not be representative of future demand. 14 CIMIS data values derived from Station 217 2015 Report. 15 Consistent with Updated Model Water Efficient Landscape Ordinance (aka AB 1881) or California Code of Regulation Title 23 Chapter 2.7


(4,356 × 6.34 × .8

1200) ≈ 18 ℎ𝑐𝑓

Therefore, the tier width for Tier 2 is proposed to be revised downward from 20 units to 18 hcf.

Revised Tier Structure

Combining the proposed tier widths for both tier 1 and tier 2 described above, yields the revised tier

structure found in Table 5-2 below. The current tier structure and widths are also shown for reference. As

noted earlier, non-SFR customers are proposed to retain their current uniform commodity rate.

Table 5-2: Revised Tier Structure

Customer Class Current

Tier Range (hcf) Current

Tier Width (hcf) Proposed

Tier Range (hcf) Proposed

Tier Width (hcf)


Tier 1 0 - 15 15 0 - 12 12

Tier 2 16 - 35 20 13 - 30 18

Tier 3 36+ ∞ 31+ ∞

MFR uniform ∞ uniform ∞

Commercial uniform ∞ uniform ∞

Irrigation uniform ∞ uniform ∞

USAGE UNDER PROPOSED TIERS

The proposed tier structure reduces the width of tiers 1 and 2, leading to more usage in higher tiers

(assuming the same level of usage). For example, 20 units of usage under the current tier structure would

produce 15 units of tier 1 water and 5 units of tier 2 water. Under the proposed tier structure, the same

20 units would produce 12 units of tier 1 water and 8 units of tier 2 water. Performing this same analysis

for all accounts yields the tier totals found in Table 5-316. Note that the total usage of 5.1M HCF is the

same regardless of tier structure – only the distribution of the usage in each tier is affected.

16 As noted earlier, CY 2013 usage data was used to determine the proposed rate structure. Therefore total usage found in Table 5-3 will not align with total demand found in Table 4-4, which represents projected demand for FY 2016 under drought conditions.


Table 5-3: Usage by Customer Class and Tier (HCF)

Customer Class Current Tier Structure Proposed Tier Structure


Tier 1 2,176,090 1,864,278

Tier 2 998,190 1,181,783

Tier 3 348,306 476,525

MFR 358,079 358,079

Commercial 564,540 564,540

Irrigation 697,006 697,006

Total 5,142,210 5,142,210


6. WATER COST OF SERVICE ANALYSIS

COST OF SERVICE PROCESS

This subsection provides an overview of a cost-of-service analysis. Each step described below will be

described in greater detail throughout this section.

A cost of service analysis distributes a utility’s revenue requirements (costs) to each customer class17.

After determining a utility’s revenue requirement, the next step in a cost of service analysis is to

functionalize its O&M costs to the following functions:

1. Water supply

2. Treatment

3. Transmission

4. Distribution and storage

5. Meter service

6. Customer billing and collection

7. General and administrative costs

The functionalization of costs allows abetter allocation of the functionalized costs to the cost causation

components. The cost causation components include:

1. Base (average) costs

2. Peaking costs (maximum day and maximum hour)

3. Meter service

4. Billing and customer service

5. Fire protection

6. Conservation

7. General and administrative costs

Peaking costs are further divided into maximum day and maximum hour demand. The maximum day

demand is the maximum amount of water used in a single day in a year. The maximum hour demand is

the maximum usage in an hour on the maximum usage day. Different facilities, such as distribution,

pumping and storage facilities, and the O&M costs associated with those facilities, are designed to meet

the peaking demands of customers. Therefore, extra capacity18 costs include the O&M and capital costs

associated with meeting peak customer demand. This method is consistent with the AWWA M1 Manual,

and is widely used in the water industry to perform cost of service analyses.

COST OF SERVICE ANALYSIS

Determination of Revenue Requirement

In this Study, water rates are calculated for FY 2016, and accordingly FY 2016 is defined as the Test Year.

Test Year revenue requirements are used in the cost allocation process. Subsequent years’ revenue

17 Further detail of the Cost-Based Rate-Setting Methodology is provided in Section 2.4.3. 18 The terms extra capacity, peaking and capacity costs are used interchangeably.


adjustments are incremental and the rates for future years are based on the revenue adjustments shown

in Table 4-10 and calculated across-the-board. The City should review the cost of service analysis at least

every five years to ensure that the rates are consistent with the costs of providing service.

The annual revenue requirements, or costs of service, to be recovered from commodity charges are O&M

expenses and capital costs. Total FY 2016 cost of service to be recovered from the City’s water customers

is shown in Table 6-1 and estimated at approximately $28.37M (line 37). Of the total revenue

requirement, nearly $23.5M19 is for operating costs and the remaining $4.8M is for rate/reserve funded

capital projects.

Planned capital expenditures in FY 2016 are approximately $7.87M, as shown in Figure 4-1 and Table 6-1

(line 7). Since the City does not expect to issue additional debt to fund its capital program, the remaining

balance of the capital program will be funded through rates and reserves over the Study period, as

reflected on line 37 of Table 6-1.

The cost of service analysis is based upon the premise that the utility must generate annual revenues

adequate to meet the estimated annual revenue requirements. As part of the cost of service analysis,

revenues from sources other than water rates and charges (e.g. revenues from miscellaneous services)

are deducted from the appropriate cost elements. The total revenue offsets found on line 29 of Table 6-1

coincides with the total projected miscellaneous revenue for FY 2016 in Table 4-6.

Additional deductions are made to reflect interest income and other non-operating income during FY

2016. Adjustments are also made to account for cash balances to ensure adequate collection of revenue

and to determine annual revenues needed from rates.

19 For determining the cost of service, the City opted to assume normal water usage levels (from CY 2013) to develop rates. Therefore, the O&M costs shown in line 3 of Table 6-1 (assumes normal usage) does not align with the O&M costs shown on line 14 of Table 4-11 (assumes reduced usage).


Table 6-1: Cost of Service Revenue Requirements

FY 2016

1 Operating Capital Total

2 Revenue Requirements

3 O&M Expenses $24,551,378 $24,551,378

4 Existing Debt Service $- $-

5 Proposed Debt Service $- $-

6 Rate Funded Capital Projects $7,842,947 $7,842,947

7 Total Revenue Requirements $24,551,378 $7,842,947 $32,394,325

8

9 Less Revenue Offsets

10 Stand-By (Fire Detectors) $51,900 $51,900

11 Backflow Prevention $50,100 $50,100

12 Plan Checking/Filing Fee $16,000 $16,000

13 Inspection Fees $1,100 $1,100

14 Rental of City Facilities $25,500 $25,500

15 Interest Income $150,000 $150,000

16 Miscellaneous Revenue $208,600 $208,600

17 Plant Investment Fees $380,000 $380,000

18 Fire Flow Surcharge $23,000 $23,000

19 Special Facilities Surcharge $- $-

20 Installation - Meter $- $-

21 Interest Income $60,000 $60,000

22 Miscellaneous Revenue $12,000 $12,000

23 Plant Investment Fees $- $-

24 Fire Flow Surcharge $- $-

25 Special Facilities Surcharge $- $-

26 Installation - Meter $- $-

27 Interest Income $60,000 $60,000

28 Miscellaneous Revenue $- $-

29 Total Revenue Offsets $503,200 $535,000 $1,038,200

30

31 Less: Adjustments

32 Pass-through Revenue $572,315 $572,315

33 Adjustment for Mid-year Increase $(70,566) $(70,566)

34 Adjustments for Cash Balance $2,486,852 $2,486,852

35 Total Adjustments $501,749 $2,486,852 $2,988,601

36

37 Revenue Requirement from Rates $23,546,429 $4,821,095 $28,367,524


Allocation of Functionalized Costs to Cost Causation Components

To allocate the cost of service among the different customer classes, costs first need to be allocated to

the appropriate cost causation components. The following section describes the allocation of the

operating and capital costs of service to the appropriate parameters of the water system.

The total cost of water service is analyzed by system function in order to equitably distribute costs in

relation to how they are incurred which then allows each cost component to be recovered through the

most appropriate revenue recovery (i.e. fixed versus volumetric). For this analysis, water costs of service

are assigned under the Base-Extra Capacity method ascribed to the following functional cost components:

Base, Max Day, Max Hour, Fire Protection, Meters, Customer/Customer Service, Conservation, and

General.

Base Costs are those operating and capital costs of the water system associated with serving customers

at a constant, or average, rate of use. Supply costs are typically considered to be based on average usage.

Extra Capacity Costs or peaking costs represent costs incurred to meet customer peak demands for water

in excess of average day usage. Total extra capacity costs are subdivided into costs associated with

maximum day and maximum hour demands. The maximum day demand is the maximum amount of

water used in a single day in a year. The maximum hour (Max Hour) demand is the maximum usage in an

hour on the maximum usage day (Max Day). Different facilities are designed to meet different peaking

characteristics. For example, transmission lines or reservoirs are designed to meet Max Day requirements.

Both have to be designed larger than they would be if the same amount of water were being used at a

constant rate throughout the year. The cost associated with constructing a larger line or reservoir is based

on the “overdesign” and is proportioned on the Max Day factor. For example, if the Max Day factor is 2.0,

then the line has to be designed twice as large as required to meet just the average usage conditions. In

this case half of the cost would be allocated to Base (or average) and the other half allocated to Max Day.

The calculation of the Max Hour and Max Day demands is explained below.

Customer Service Related Costs include customer related costs. Customer costs include such costs as

meter reading, billing, collecting, and accounting.

Meter Costs or meter service costs include maintenance and capital costs associated with meters and a

portion of the capacity related costs. These costs are assigned based on meter size or equivalent meter

capacity.

Conservation Costs are costs related to conservation programs and allocated to all classes, and are

primarily targeted to the upper tiers in the SFR class.

The allocation of costs of service into these principal components provides the means for determining the

costs to the various customer classes on the basis of their respective base, extra capacity and customer

requirements for service.


Peaking Allocation

To determine how costs should be allocated to average and peak (Max Day and Max Hour) demands, the

allocation percentages are derived from actual historical data and assigned to each cost component.

Customer service related costs are allocated 100 percent to the customer service component. Costs

related to meter maintenance are allocated to the meter service component. These two components,

plus a portion of max day/max hour peaking costs are included in the fixed monthly service charges.

To calculate volume related cost allocation, system peaking factors are used. The base demand is the

average of the annual usage expressed as the usage per day. The base demand is assigned a value of 1.0.

The Max Day and Max Hour values shown in Table 6-2 were originally published in the City’s 2005 Water

Master Plan20.

Table 6-2: System Peaking Factors

Factor

Base 1.00

Max Day 1.75

Max Hour 3.00

Next, the relative proportion of costs assigned to Base, Max Day, and Max Hour are used to calculate cost

components. Cost components related solely to providing average day demand, such as supply sources,

are allocated 100% to Base. Cost components that are designed to meet Max Day peaks, such as

reservoirs and transmission facilities, are allocated to both Base and Max Day factors. Since facilities such

as reservoirs and distribution systems are also designed to handle fire flow, an allocation is also provided

for fire flow. Based on RFC and staff estimates, fire flow was assigned 10% of the system peaking

allocation.

The allocation for Max Day peaking is calculated as follows:

𝑀𝑎𝑥 𝐷𝑎𝑦 =𝑀𝑎𝑥 𝐷𝑎𝑦 − 𝐵𝑎𝑠𝑒

𝑀𝑎𝑥 𝐷𝑎𝑦 −

𝐹𝑖𝑟𝑒

2

The Max Day factor of the City’s system is 1.75, which means that Max Day facilities are designed to

provide 175% of the average day capacity. In other words, 75 out of 175, less the allocation for fire,

represents the portion required to meet Max Day requirements. The 10% fire allocation is split between

two components (Base and Max Day) and is therefore divided by two in the formula. Applying the formula

to the system peaking factors found in Table 6-2, yields the following:

𝑀𝑎𝑥 𝐷𝑎𝑦 = 1.75 − 1

1.75 −

. 10

2 ≈ 38%

20 System peaking factors can be found in the 2005 Water Master Plan, Section III-5


𝐵𝑎𝑠𝑒 = 𝐵𝑎𝑠𝑒

𝑀𝑎𝑥 𝐷𝑎𝑦 −

𝐹𝑖𝑟𝑒

2=

1

1.75 −

. 10

2 ≈ 52%

Cost components designed for Max Hour peaks, such as distribution system facilities, are allocated

similarly. The Max Hour factor is 3.00, so Max Hour facilities are designed to provide 300% of the average

day capacity. Out of this 300, 100 represents the base demand, 75 represents the Max Day requirement

and the remainder – 125 – represents the Max Hour requirement, less the allocation for fire. The 10% fire

allocation is split between three components (Base, Max Day, and Max Hour) and is therefore divided by

three in the formula. The allocation of Max Hour facilities is shown below:

𝐵𝑎𝑠𝑒 = 𝐵𝑎𝑠𝑒

𝑀𝑎𝑥 𝐻𝑜𝑢𝑟 −

𝐹𝑖𝑟𝑒

2=

1

3 −

. 10

3 ≈ 30%

𝑀𝑎𝑥 𝐷𝑎𝑦 = 𝑀𝑎𝑥 𝐷𝑎𝑦 − 𝐵𝑎𝑠𝑒


𝐹𝑖𝑟𝑒

3=

. 75

3 −

. 10

3 ≈ 22%

𝑀𝑎𝑥 𝐻𝑜𝑢𝑟 = 𝑀𝑎𝑥 𝐻𝑜𝑢𝑟 − 𝑀𝑎𝑥 𝐷𝑎𝑦


𝐹𝑖𝑟𝑒

3=

1.25

3 −

. 10

3 ≈ 38%

The results of the allocation are presented in Table 6-3 below. These percentages are then applied to the

operating and capital improvement costs amongst Base, Max Day, and Max Hour parameters for cost of

service calculations, which is explained in detail in the following sub-sections. The factors shown below

are taken from Table 6-2on the previous page.

Table 6-3: Max Day/Max Hour Facility Allocation Factors

Factor Base Max Day Max Hour Fire

1 Base 1.00 100% 0% 0% 0%

2 Max Day 1.75 52% 38% 0% 10%

3 Max Hour 3.00 30% 22% 38% 10%

Peaking Factors by Customer Class

As noted above, the peaking characteristics of each customer class can place additional stress on the

water system which translates into additional costs. For SFR customers, these peaking characteristics are

the only cost differentiator between the tier prices. The max day (MD) and max hour (MH) peaking factor

for each customer class are calculated as follows:

𝑀𝑎𝑥 𝐵𝑖𝑙𝑙𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑 𝑈𝑠𝑎𝑔𝑒 ÷ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐵𝑖𝑙𝑙𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑 𝑈𝑠𝑎𝑔𝑒 = 𝑀𝐷 𝑃𝑒𝑎𝑘𝑖𝑛𝑔 𝐹𝑎𝑐𝑡𝑜𝑟

𝑀𝐷 𝑃𝑒𝑎𝑘𝑖𝑛𝑔 𝐹𝑎𝑐𝑡𝑜𝑟 × (𝑆𝑦𝑠𝑡𝑒𝑚 𝑀𝐻 𝐹𝑎𝑐𝑡𝑜𝑟 ÷ 𝑆𝑦𝑠𝑡𝑒𝑚 𝑀𝐷 𝐹𝑎𝑐𝑡𝑜𝑟 = 𝑀𝐻 𝑃𝑒𝑎𝑘𝑖𝑛𝑔 𝐹𝑎𝑐𝑡𝑜𝑟

𝑀𝐷 𝑃𝑒𝑎𝑘𝑖𝑛𝑔 𝐹𝑎𝑐𝑡𝑜𝑟 × (3.00 ÷ 1.75) = 𝑀𝐻 𝑃𝑒𝑎𝑘𝑖𝑛𝑔 𝐹𝑎𝑐𝑡𝑜𝑟


The peaking factor calculation for each SFR tier is shown below in Table 6-4. The City preferred to use a

common peaking factor for non-SFR customers.

Table 6-4: Customer Class Peaking Factors

Peaking Factors Max Billing

Period (hcf)21 Average Billing Period (hcf)22

MD Peaking Factor

MH Peaking Factor


Tier 1 325,101 310,657 1.05 1.80

Tier 2 261,217 196,964 1.33 2.28

Tier 3 133,363 79,421 1.68 2.88

Non-SFR 362,965 269,776 1.35 2.31

Allocation of Operating Expenses

In this step, the Water Enterprise’s O&M costs are functionalized and then assigned to the various cost

categories. Table 6-5 provides a matrix of the City’s cost functions to cost components, using FY 2016 as

the baseline to account for how costs are incurred.

Water supply costs, Pumping, and Conservation all have cost components by the same name, and

therefore, are all allocated entirely to their respective cost categories. Storage is allocated based on the

Max Day facility allocation (see line 2 in Table 6-3). Both Distribution and Maintenance are allocated

based on the Max Hour facility allocation (see line 3 in Table 6-3). Since Quality Assurance applies to

normal usage, it is entirely assigned to Base. Engineering Services is allocated to the various cost

categories based on the City’s water asset valuation. Further explanation of the asset allocation process

is provided in the following subsection. Administration costs are distributed 30% to Customer Service and

the remainder to General. General expenses are related to total system operations and cannot be

specifically allocated to individual functions such as storage or distribution, etc. These expenses are

therefore allocated in the same proportion as all other operating expenses.

Table 6-5: Functional Cost Allocation to Cost Categories

Function Supply Base Max Day

Max Hour

Fire Cons. Pumping Meter Cust. General TOTAL

Water Costs 100% 100%

Pumping 100% 100%

Storage 52% 38% 0% 10% 100%

Distribution 30% 22% 38% 10% 100%

Quality Assurance 100% 100%

Administration 30% 70% 100%

Maintenance 30% 22% 38% 10% 100%

Eng. Services 0% 37% 27% 14% 12% 0% 1% 9% 0% 0% 100%

Conservation 100% 100%

21 Derived from CY 2013 usage data. Max Billing Period for CY 2013 was September/October. 22 Derived from CY 2013 usage data. Average Billing Period usage is total annual usage divided by 6 (number of billing periods).


Functionalization of O&M Costs

Table 6-6 shows the functionalization of the Water Enterprise’s O&M expenses. Functionalizing O&M

expenses allows RFC to follow the principles of rate setting theory in which the end goal is to allocate

O&M expenses to cost causation components. Each function is assigned to the fixed monthly charge, the

per unit volumetric charge, or both.

Table 6-6: Distribution of Functionalized O&M Costs

Line No. Cost Components Cost of Service Fixed Volumetric

1 Supply $15,983,887

2 Base $2,513,271

3 Max Day $1,466,409

4 Max Hour $733,204

5 Fire $693,438

6 Conservation $132,805

7 Pumping $705,289

8 Meter $302,359

9 Customer $575,164

10 General $1,334,318

11 Total O&M $24,440,143

Allocation of Capital Costs

Capital costs include capital improvements financed from annual revenues, debt service and other

sources. Capital costs related to specific facilities will vary significantly from year to year. Allocating these

costs based on the functions of these specific facilities would cause the rates to the different customer

classes to change from year to year. A reasonable method of assigning capital costs to functional

components widely practiced in the industry is to allocate such costs on the basis of net plant investment.

This method recognizes that over a period of time these allocations will provide costs to be passed on to

customers equitably.

Net plant investment is represented by the total replacement cost of utility facilities less accumulated

depreciation (Net Plant Investment or Net Assets = Replacement Cost – Replacement Cost Depreciation).

The estimated fiscal year net plant investment in water facilities consists of net plant in service as of the

City’s 2013 Asset Management Plan Study.

Costs are allocated based on the design criteria of each facility. For example, distribution lines are

allocated to Max Hour since these facilities are designed to handle the maximum hour demand if needed.

Referencing the Distribution line item in Table 6-7 below, it reflects the Max Hour allocation found on line

3 of Table 6-3. The investment in general plant, i.e. general investments not classified as any particular

function such as storage, treatment, distribution, etc., is allocated to each cost component on the basis

of all other investments. The resulting allocation of net investment serves as the basis for allocating the


capital costs shown in Table 6-7. The resulting allocation is also used above in Table 6-5 for the Engineering

Services line item in the O&M cost allocation.

Table 6-7: Capital Allocation to Cost Categories23

Capital Allocation

Base Max Day Max Hour Fire Pumping Meter Customer General TOTAL

Land $0 $0 $0 $0 $0 $0 $0 $0 $0

Wells $149,908 $0 $0 $0 $0 $0 $0 $0 $149,908

Meters $0 $0 $0 $0 $0 $28,905,708 $0 $0 $28,905,708

Fire $0 $0 $0 $10,075,388 $0 $0 $0 $0 $10,075,388

Reservoir $53,646,478 $38,948,813 $0 $10,288,366 $0 $0 $0 $0 $102,883,657

Distribution $33,312,629 $24,059,121 $42,566,137 $11,104,210 $0 $0 $0 $0 $111,042,096

Transmission $29,306,692 $21,277,462 $0 $5,620,462 $0 $0 $0 $0 $56,204,615

Buildings $0 $0 $0 $0 $0 $0 $725,491 $725,491 $1,450,983

Equipment $234,917 $0 $0 $0 $0 $0 $0 $0 $234,917

Vehicles $0 $0 $0 $0 $0 $0 $0 $228,096 $228,096

Pumps $0 $0 $0 $0 $3,784,628 $0 $0 $0 $3,784,628

Total Asset $116,650,625 $84,285,395 $42,566,137 $37,088,425 $3,784,628 $28,905,708 $725,491 $953,587 $314,959,997

37% 27% 14% 12% 1% 9% 0% 0% 100%

Determination of Unit Cost Process

In order to allocate costs of service to the different customer classes, unit costs of service need to be

developed for each cost component. The unit costs of service are developed by dividing the total annual

costs allocated to each parameter by the total annual service units of the respective component, as listed

below:

Base costs are divided by the total number of units sold (hcf).

Extra capacity units are determined based on the peaking factors of the water system, shown in

Table 6-9.

Fire protection costs are redistributed to the fixed meter charge.

Conservation costs are divided by the total number of units sold (hcf). Conservation costs are

allocated to all customer classes and tiers as a percentage of the class’ use relative to the total

usage.

Pumping costs are divided by the total number of units subject to pumping. City staff and RFC

estimated the total units subject to pumping charges by dividing the City’s estimated annual pump

charge revenue of $770,000 by the current pump charge of $0.16, yielding a total of 4,812,500

hcf.

Meter costs are based on equivalent meters. Table 6-8 shows the determination of the total

annual units by customer class.

Customer service related cost components are based on number of accounts and do not fluctuate

with increases in meter size or usage.

General expenses are allocated in the same proportion as all other operating expenses.

23 The Supply and Conservation cost categories have no capital allocation and have been omitted in this table for presentation purposes. Sum of line items may not equal totals due to rounding.


Based on the list above, three annual service units must first be determined before determining a unit

cost for each cost category. These three annual service units are:

1. The number of accounts (Table 6-8)

2. The number of equivalent meter units (Table 6-8)

3. The extra capacity units for Max Day and Max Hour (Table 6-9)

The following subsections will determine these annual service unit values.

Determination of Equivalent Meter Units and Customers

In order to create parity across the various meter sizes, each meter size is assigned a factor relative to a

5/8” meter, which has a value of 1. According to the AWWA M1 Manual, a particular meter size’s ratio of

meter and capacity servicing costs relative to that of a 5/8” meter is its “Equivalent Meter Units” (EMU).

For example, a 2-inch meter has 5.33 times the throughput capacity of a 5/8” meter and therefore has a

multiplication factor of 5.33 to determine its EMU to 5/8” meter. The Meter & Capacity factor escalates

as meter size increases because the City’s cost to service a meter increases with its size. Based on the CY

2013 usage and account data, the customer count and EMUs are shown in Table 6-8.

Table 6-8: Equivalent Meter Unit Calculation

(A) (B) C = A x B

Meter Size

Capacity (gpm)

AWWA Ratio

Number of Meters

Equivalent Meters

5/8 30 1.00 15,249 15,249

1 50 1.67 990 1,649

1 1/2 100 3.33 337 1,124

2 160 5.33 298 1,590

3 350 11.67 37 432

4 630 21.00 22 462

6 1300 43.33 7 304

Monthly Service Units 16,940 20,810

Annual Service Units 203,280 249,720

The total number of meters is equivalent to the total number of customers. This figure serves as the divisor

for the customer cost category. The equivalent meters serves as the divisor for all meter related costs.

Both of these figures are multiplied by 12 to convert the totals from monthly service units into annual

service units.

Determination of Max Day and Max Hour Extra Capacity Units

The extra capacity units are determined based on the peaking factors of the water system, shown in Table

6-4. The Max Day Demand is the Max Day Factor times the Daily Usage and the Max Day Requirement is

the Max Day Demand less the Daily Usage. The Max Hour Demand is calculated similarly and the Max

Hour Requirement is the Max Hour Demand less the Max Day Demand. The extra capacity units for both

Max Day and Max Hour are shown in the final row of Table 6-9 on the next page.


Table 6-9: Determination of Extra Capacity Units24

A = Table 5-3 B = A/365 C = Table 6-4 D = B x C E = D - B F = Table 6-4 G = B x F H = G - D

Annual Use (hcf)

Average Daily Use (hcf/day)

MD Peaking Factor

MD Total Capacity (hcf/day)

MD Extra Capacity (hcf/day)

MH Peaking Factor

MH Total Capacity (hcf/day)

MH Extra Capacity (hcf/day)

SFR

Tier 1 1,864,278 5,108 1.05 5,363 255 1.80 9,194 3,831

Tier 2 1,181,783 3,238 1.33 4,306 1,068 2.28 7,382 3,076

Tier 3 476,525 1,306 1.68 2,193 888 2.88 3,760 1,567

MFR 358,079 981 1.35 1,324 343 2.31 2,270 946

Commercial 564,540 1,547 1.35 2,088 541 2.31 3,579 1,491

Irrigation 697,006 1,910 1.35 2,578 668 2.31 4,419 1,841

Total 5,142,210 3,765 12,752

Allocation of General Costs, Public Fire Protection Costs, and Peaking Costs

6.2.8, General Costs are redistributed to all other cost categories in the same proportion as all other

operating expenses. Furthermore, Public Fire Protection (Fire) costs are allocated entirely to the fixed

meter charge, since all users benefit from fire protection regardless of volumetric use. Finally, a portion

of peaking costs are allocated to the meter charge. These allocations are summarized in Table 6-1025.

Table 6-10: Allocation of General, Fire, and Peaking Costs

Supply Base Max Day Max Hour Fire

Operating Expenses $15,983,887 $2,060,882 $1,466,409 $733,204 $693,438

Capital Expenses $0 $1,785,572 $1,290,157 $651,560 $567,713

Total Cost of Service $15,983,887 $3,846,454 $2,756,566 $1,384,764 $1,261,151

Allocation of General Cost $434,972 $311,723 $156,595 $142,616

Allocation of Public Fire Costs -$1,403,767

Allocation of Peaking Cost to Meter -$1,687,559 -$847,747

Total Adjusted Cost of Service $15,983,887 $4,281,426 $1,380,730 $693,612 $0

Conservation Pumping Meter Customer General TOTAL

Operating Expenses $132,805 $705,289 $754,748 $575,164 $1,334,318 $24,440,143

Capital Expenses $0 $57,931 $442,460 $11,105 $14,597 $4,821,09526

Total Cost of Service $132,805 $763,220 $1,197,207 $586,270 $1,348,915 $29,261,238

Allocation of General Cost $15,018 $86,308 $135,385 $66,298 -$1,348,915

Allocation of Public Fire Costs $1,403,767

Allocation of Peaking Cost to Meter $2,535,306

Total Adjusted Cost of Service $147,823 $849,528 $5,271,666 $652,567 $0 $29,261,238

24 The abbreviations MD for Max Day and MH for Max Hour are used in the table. Sum of line items may not match total due to rounding. 25 Table 6-10 has been split into two portions for presentation purposes. 26 The Capital Expenditures to the captured from rates can be found in the revenue requirement in Table 6-1.


Determination of Unit Cost

To determine a unit cost for each cost component, the total adjusted cost of service for each cost

component found in Table 6-10 is divided by its total number of service units. The total number of service

units for each cost component are detailed above in Section 6.2.8. Table 6-11 below details the unit cost,

number of service units, unit of measure, and source of the service units for each cost component.

Table 6-11: Determination of Unit Cost

Cost Component Adjusted COS Service Units Unit of Measure Unit Cost Source

1 Supply $15,983,887 5,142,210 hcf $3.11 Table 5-3

2 Base $4,281,426 5,142,210 hcf $0.83 Table 5-3

3 Max Day $1,380,730 3,765 hcf/day $366.76 Table 6-9

4 Max Hour $693,612 12,752 hcf/day $54.39 Table 6-9

5 Conservation $147,823 5,142,210 hcf $0.03 Table 5-3

6 Pumping $849,528 4,812,500 hcf $0.18 Section 6.2.8

7 Meter $5,271,666 249,726 Equivalent Meters $21.11 Table 6-8

8 Customer $652,567 203,282 Annual Bills $3.21 Table 6-8

9 Total $29,261,238

Allocation of Costs to Customer Class

Lastly, costs are allocated to customer classes using the unit costs (repeated on line 1 in each portion of

Table 6-12 below) developed in Table 6-11 and the respective number of units for each customer class.

Respective allocations for FY 2016 are below in Table 6-1227.

Table 6-12: Allocation of Costs to Customer Class28

A B = Unit Cost x A C = Unit Cost x A D = Unit Cost x A E = Unit Cost x A

Usage (hcf) (Table 5-3) Supply Base Conservation Pumping

1 Unit Cost (Table 6-11) $3.11 $0.83 $0.03 $0.18

2 Single Family Residential

3 Tier 1 1,864,278 $5,794,864 $1,552,206 $53,592

4 Tier 2 1,181,783 $3,673,418 $983,958 $33,973

5 Tier 3 476,525 $1,481,216 $396,757 $13,699

6

7 MFR 358,079 $1,113,041 $298,138 $10,294

8 Commercial 564,540 $1,754,797 $470,038 $16,229

9 Irrigation 697,006 $2,166,552 $580,330 $20,037

10 Pumping 4,812,500 $849,528

11

12 Base Meters

27 Table 6-12 has been separated into three portions for presentation purposes. 28 The Unit Costs in Line 1 have been rounded to the nearest whole cent. Multiplying these values by the usage found in Column A may produce slightly different results than what is shown in the table in each respective column.


F G = Unit Cost x F H = Unit Cost x F I = Unit Cost x H

Max Day Units29 Max Day Max Hour Units30 Max Hour

1 Unit Cost (Table 6-11) $366.76 $54.39


3 Tier 1 255 $93,663 3,831 $208,360

4 Tier 2 1068 $391,868 3,076 $167,303

5 Tier 3 888 $325,599 1,567 $85,214

6

7 MFR 343 $125,932 946 $51,455

8 Commercial 541 $198,541 1,491 $81,123

9 Irrigation 668 $245,128 1,841 $100,158

10 Pumping

11

12 Base Meters

J K = Unit Cost x J L = Unit Cost x J M = Unit Cost x J

Annual Eq. Meters Meter Annual Bills Customer

1 Unit Cost (Table 6-11) $21.11 $3.21


3 Tier 1

4 Tier 2

5 Tier 3

6

7 MFR

8 Commercial

9 Irrigation

10 Pumping

11

12 Base Meters 249,726 $5,271,666 203,282 $652,567

Aggregating all of the cost allocation from three portions of Table 6-12 above, yields the following totals

for each customer class and tier as shown in Table 6-13.

29 Derived from Column E of Table 6-9 30 Derived from Column H of Table 6-9


Table 6-13: Total Cost Allocation to Customer Class and Tier

1 Customer Class/Tier Total Cost Allocation

2 Single Family Residential $15,255,687

3 Tier 1 $7,702,685

4 Tier 2 $5,250,519

5 Tier 3 $2,302,483

6

7 MFR $1,598,859

8 Commercial $2,520,728

9 Irrigation $3,112,204

10 Pumping $849,528

11

12 Base Meters $5,924,233

13 Total COS $29,261,238

Comparison of Cost Allocation to Customer Class

After performing a cost of service analysis and adjusting the tier structure, each customer class and tier’s

responsibility of the Water Enterprise’s overall costs is likely to shift. Table 6-14 shows a comparison of

the proposed cost allocation to each customer class and tier shown in Table 6-13 and the current cost

allocation.

Table 6-14: Comparison of Proposed and Current Cost Allocation to Customer Classes31

Customer Proposed % of Total Current % of Total Difference

1 SFR $15,255,687 52.1% $15,369,505 54.5% -2.3%

2 MFR $1,598,859 5.5% $1,636,420 5.8% -0.3%

3 Commercial $2,520,728 8.6% $2,579,946 9.1% -0.5%

4 Irrigation $3,112,204 10.6% $3,185,317 11.3% -0.6%

5 Pumping $849,528 2.9% $770,000 2.7% 0.2%

6

7 Meters $5,924,233 20.2% $4,685,205 16.6% 3.6%

8 Total $29,261,238 100% $28,226,392 100% 0%

Based on the proposed cost allocation, the total volumetric costs for all customer classes will stay the

same or decrease. However, more costs have been shifted to the meter charge, which is proposed to

increase 3.6% overall. Note that the proposed cost allocation collects more total revenue as a result of

the proposed revenue adjustments for FY 2016 as outlined in Table 4-10.

31 Sum of line items may not equal total due to rounding.


FIXED VS. VARIABLE REVENUE SPLIT

To achieve the City’s goal of rate stability, a greater portion of the peaking costs were assigned to meter

(fixed charges). The amount of peaking costs assigned to meter can be found in Table 6-10 (“Allocation of

Peaking Costs to Meter). As a result, the fixed revenue increases from 16% to 20% under the proposed

cost-of-service based rates. A summary is provided in Table 6-15 below.

Table 6-15: Fixed vs. Variable Revenue

Fixed Variable Total32

Current $4,685,205 $23,541,187 $28,226,392

16% 84% 100%

Proposed $5,924,233 $23,337,005 $29,261,238

20% 80% 100%

The proposed fixed and variable revenues shown above are better aligned with the Water Enterprise’s

fixed and variable costs. Water supply costs, including pass-through, represents the Water Enterprise’s

variable costs; the remaining portion (“Other O&M Costs) are the Water Enterprise’s fixed costs33. Using

the values from the projected O&M costs (Table 4-8), the ratio of fixed and variable costs are summarized

below for each year of the Study period.

Table 6-16: Fixed vs. Variable Costs

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Water Supply Costs $11,902,723 $13,484,128 $14,699,526 $14,707,342 $14,715,158

Pass-through Water Supply Costs $407,635 $1,053,945 $1,235,207 $1,315,091 $1,395,780

Other O&M Costs $7,995,176 $8,598,339 $8,878,512 $9,144,868 $9,419,214

TOTAL O&M EXPENSES $20,305,534 $23,136,412 $24,813,245 $25,167,301 $25,530,152

Variable Costs (%) 61% 63% 64% 64% 63%

Fixed Costs (%) 39% 37% 36% 36% 37%

To promote rate stability, it is best to align fixed costs with fixed revenues. The Water Enterprise’s current

fixed revenue of 16% is well below its fixed costs of 39%, as shown in Table 6-16. Under the proposed

rates, the Water Enterprise will increased its fixed revenue to 20%, which is better aligned with fixed costs.

On the other end of the spectrum, the California Urban Water Conservation Council34 (CUWCC)

recommends that no more than 30% of revenues be collected on the fixed charge, so a conservation

pricing signal can still be maintained. The proposed fixed revenue generation promotes the City’s rate

stability goals while complying with the CUWCC’s recommendation.

32 The total revenue generated from current and proposed rates can also be found in Table 6-14. 33 Fixed costs are calculated by the “Other O&M Costs” line item divided by Total O&M Expenses. 34 The City has been a signatory of the CUWCC since 1991.


7. RATE DESIGN AND CUSTOMER IMPACTS

DEVELOPMENT OF MONTHLY FIXED CHARGE

The monthly fixed charges proposed for FY 2016 in Table 7-1 are built from adding up the monthly service

charge components – Customer Service and Meters. The customer service cost is the same for each

account regardless of meter size. The meter component of the monthly fixed charge is determined by

multiplying the unit cost of $21.11 (found in Table 6-11) by the appropriate meter factor found in Table

6-8. Adding these two components together yields the total proposed monthly base fee for each meter

size for FY 2016, as shown in Table 7-1 below. Note that the total projected revenue of $5.9M aligns with

the total meter allocation on line 7 in Table 6-14.

Table 7-1: Development of Monthly Fixed Charge

A B C D = B + C

Meter

Size Meter Ratio Meter Customer

Proposed Charges

Current Charges

Difference No. of

Meters Projected Revenue

Table 6-8 Table 6-11 Table 6-11 Table 4-1 Table 6-8

1 5/8 1.00 $21.11 $3.21 $24.32 $18.19 34% 15,249 $4,450,310

2 1 1.67 $35.18 $3.21 $38.40 $33.11 16% 990 $456,005

3 1 1/2 3.33 $70.37 $3.21 $73.58 $62.76 17% 337 $297,736

4 2 5.33 $112.59 $3.21 $115.80 $102.57 13% 298 $414,349

5 3 11.67 $246.28 $3.21 $249.50 $199.96 25% 37 $110,844

6 4 21.00 $443.31 $3.21 $446.52 $302.28 48% 22 $117,952

7 6 43.33 $914.76 $3.21 $917.97 $671.87 37% 7 $77,156

8 Total 16,940 $5,924,352

PROPOSED MONTHLY FIXED CHARGES FOR STUDY PERIOD

Applying the proposed revenue adjustments from Table 4-10 to the proposed monthly fixed charges in

Table 7-1 above yields the proposed monthly fixed charges for the Study period in Table 7-2.

Table 7-2: Proposed Monthly Fixed Charges for Study Period

Current FY 2016

Proposed35 FY 2017

Proposed FY 2018

Proposed FY 2019

Proposed FY 2020

Proposed

Rev Adj. 3% 3% 1% 0% 0%

5/8 $18.19 $24.32 $25.05 $25.31 $25.31 $25.31

1 $33.11 $38.40 $39.56 $39.96 $39.96 $39.96

1 1/2 $62.76 $73.58 $75.79 $76.55 $76.55 $76.55

2 $102.57 $115.80 $119.28 $120.48 $120.48 $120.48

3 $199.96 $249.50 $256.99 $259.56 $259.56 $259.56

4 $302.28 $446.52 $459.92 $464.52 $464.52 $464.52

6 $671.87 $917.97 $945.51 $954.97 $954.97 $954.97

35 The revenue adjustment shown represents a 3% adjustment in overall revenue from the current overall revenue. It is not a 3% across-the-board adjustment from the current rates to the “FY 2016 Proposed” rates. Proposed rates from FY 2017 onwards are simple across-the-board adjustments based on the COS-based rate in FY 2016.


DEVELOPMENT OF VOLUMETRIC RATES

Table 7-3 shows the development of the tiered rate for SFR customers and uniform rates for non-SFR

customers. Base and supply are the same regardless of tier and class because the City has a single source

of water via Calleguas. The only differentiator between the tiers/classes are peaking costs assigned to

each tier/class. Tier 1 is assumed to have the lowest peaking cost because it provides for indoor water

usage with minimal peaking. Tier 2 has a higher peaking cost because it covers outdoor usage (irrigation).

Tier 3 has the highest peaking cost because it is represents the largest amount of non-household/indoor

usage.

The rate for each cost component for every tier/class is determined by dividing the cost component for

the class/tier (found in Table 6-12) by the usage in the tier/class. For example, the SFR-Tier 2 base charge

rate is calculated as follows:

𝐵𝑎𝑠𝑒 𝐶𝑜𝑚𝑝𝑜𝑛𝑒𝑛𝑡 𝐴𝑠𝑠𝑖𝑔𝑛𝑒𝑑 𝑡𝑜 𝑆𝐹𝑅 𝑇𝑖𝑒𝑟 2 ÷ 𝑈𝑠𝑎𝑔𝑒 𝑖𝑛 𝑇𝑖𝑒𝑟 2 = 𝑅𝑎𝑡𝑒

$983,958 ÷ 1,181,783 = $0.83

The same calculation is repeated for all cost components for all customer classes and tiers. The resulting

rates are shown below in Table 7-3.

The City relies entirely on imported water from Calleguas to meet demand. Calleguas routinely adjusts its

wholesale rates it charges the Water Enterprise to meets its own operational and capital costs. Per the

provisions of Government Code Section 53756, water agencies such as the City, are able to pass through

the incremental increase in wholesale water costs automatically. This provision is referred to as a “pass-

through provision”. Column G in Table 7-3 below shows the pass-through component per hcf.


Table 7-3: Development of Volumetric Rates

A B C D E F G

Customer Class Usage Supply Base Peaking36 Conservation Pumping Pass

Thru37 Total Rate

1

2 SFR

3

4 Tier 1 1,864,278 $5,794,864 $1,552,206 $302,023 $53,592

5 $3.11 $0.83 $0.16 $0.03 $0.11 $4.25

6

7 Tier 2 1,181,783 $3,673,418 $983,958 $559,171 $33,973

8 $3.11 $0.83 $0.47 $0.03 $0.11 $4.56

9

10 Tier 3 476,525 $1,481,216 $396,757 $410,812 $13,699

11 $3.11 $0.83 $0.86 $0.03 $0.11 $4.95

12 MFR 358,079 $1,113,041 $298,138 $177,386 $10,294

13 $3.11 $0.83 $0.50 $0.03 $0.11 $4.58

14 Commercial 564,540 $1,754,797 $470,038 $279,664 $16,229

15 $3.11 $0.83 $0.50 $0.03 $0.11 $4.58

16 Irrigation 697,006 $2,166,552 $580,330 $345,285 $20,037

17 $3.11 $0.83 $0.50 $0.03 $0.11 $4.58

18 Pumping 4,812,500 $0.18 $0.18

PROPOSED VOLUMETRIC CHARGES FOR STUDY PERIOD

The proposed volumetric charges developed for each tier in Table 7-3 are shown in the FY 2016 column

in Table 7-4 below. Much like the monthly fixed charges, the volumetric charges are increased each year

of the Study period, per the proposed revenue adjustments found in Table 4-10.

36 Peaking costs includes both the Max Day and Max Hour cost allocations from Table 6-12. 37 Pass-through costs of $572,315 are based on normal usage from CY 2013 data. The pass-through costs of $407,635 shown in the Proposed Financial Plan Pro-Forma in Table 4-11 is based on reduced water sales in FY 2016. Pass-through costs are evenly distributed across all units sold ($572,315/5,142,210 hcf) = $0.11/hcf.


Table 7-4: Proposed Volumetric Charges for FY 2016 and FY 2017

SFR Rates Meter Size Current 6/1/2016 % Change 1/1/2017 % Change

Quantity Rates without Pass-through Water Supply Costs

(A1) Tier 1 (hcf) $4.14 $4.26

(A2) Tier 2 (hcf) $4.45 $4.58

(A3) Tier 3 (hcf) $4.84 $4.98

Pass-through Costs

Incremental Pass-through Cost $0.11 $0.14

(B) Cumulative Pass-through Cost $0.11 $0.25

Total Quantity Rates Including Pass-through Costs

A1 + B Tier 1 (hcf) $4.22 $4.25 1% $4.51 6.1%

A2 + B Tier 2 (hcf) $4.51 $4.56 1% $4.83 5.9%

A3 + B Tier 3 (hcf) $4.81 $4.95 3% $5.23 5.7%

Non-SFR Rates Meter Size Current 6/1/2016 % Change 1/1/201738 % Change

Quantity Rates without Pass-through Water Supply Costs

(A1) MFR (hcf) $4.47 $4.60

(A2) Commercial (hcf) $4.47 $4.60

(A3) Irrigation (hcf) $4.47 $4.60

Pass-through Costs

Incremental Pass-through Cost $0.11 $0.14

(B) Cumulative Pass-through Cost $0.11 $0.25

Total Quantity Rates Including Pass-through Costs

A1 + B MFR (hcf) $4.57 $4.58 0% $4.85 6%

A2 + B Commercial (hcf) $4.57 $4.58 0% $4.85 6%

A3 + B Irrigation (hcf) $4.57 $4.58 0% $4.85 6%

SINGLE FAMILY RESIDENTIAL BILL IMPACTS

Table 7-1 compares the bill totals for a residential customer with a typical 5/8” meter at various levels of

usage for the current rates and the proposed rates. The differential in price is caused by two main factors

– an increase in the per unit rate (as show in Table 7-2 and Table 7-4) as well a change in the tier structure

(as shown in Table 5-2). The proposed tier structure reduces the tier width for both tier 1 and tier 2,

resulting in more usage in higher tiers – assuming the same level of usage.

38 The revenue adjustment shown represents a 3% adjustment in overall revenue from the current overall revenue. It is not a 3% across-the-board adjustment from the current rates to the “FY 2016 Proposed” rates. Proposed rates from FY 2017 onwards are simple across-the-board adjustments based on the COS-based rate in FY 2016.


Figure 7-1: Residential Bill Total Comparison of Current vs. Proposed Rates (5/8” meter)

10 hcf 18 hcf 50 hcf

Current Rates $60.39 $95.02 $243.84

Proposed Rates $66.82 $102.68 $256.40

Percentage Change 11% 8% 5%


8. CONCLUSION

This Study was conducted to address the environment of revenues from rates being outpaced by

operating expenditures, costs to maintain existing infrastructure, and the changing water supply cost

situation in consideration of the current drought. In determining future revenue requirements for the

City’s Water Enterprise, RFC developed a financial plan model that incorporates pass-through costs for

increasing water supply costs from Calleguas, developed reserve policies, and ensured rates that

minimized rate impact to its customers.

RFC recommends that the City take steps to implement the revised rates. Because the financial landscape

including customer usage, changing water supply costs, revised CIP estimates, and other estimates is

continuously changing, RFC further recommends that the City revisit its financial plan and its inputs on a

periodic basis.

city of thousand oaks attachment #2

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