City of Detroit Water and Sewerage Department

1. City of DetroitWater and Sewerage Department Wholesale Customer Rates Meeting Sewage Disposal System Meeting #4 Preliminary Proposed FY 2010-11 Sewer Rates January 21, 2010

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

3. Information Portals • DWSD web site • www.dwsd.org • Customer Information / “Wholesale Customers Season Rate Schedule” • DWSD Customer Outreach Portal • www.dwsdoutreach.org • For information contact Teresa Newman • teresa@projectinnovations.com Page 3

4. Today’s Agenda • Rollout Presentation • Updated Preliminary Revenue Requirements (And System Revenue) for FY 2010-11 • Updated Units of Service and Cost of of Service Allocations to Customers • Presentation of Preliminary Proposed Rates to Customers • Illustration of Rate Calculation • Sewer Rates Work Group • Detailed Discussions on Rate Issues Page 4

5. The 3 Fundamental Steps in the Sewer Rate Methodology • Revenue Requirement Projections • How Much Money is Needed? • Cost of Service Analysis • From Whom Should the Money be Collected? • Design of Recommended Rates • How Should DWSD Services be Priced? Page 5

6. Timeout for Some Perspective . . .

7. DWSD Sewer Rate Changes (1983-2010) Avg =6.5% Avg =6.4% Avg =3.2% Avg =3.0% Page 7

8. Annual Capital Improvement Investments Sewage Disposal System – ($ millions) Page 8

9. Compliance with Wastewater Treatment Standards - A Very Possible Potential Reality Stormwater CSO Sanitary Page 9

10. Federal Representative EPA Citizen Goals State Agency Utility Communities Funding Wastewater Infrastructure:A Historical Perspective Page 10

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

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

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

14. FY 2010-11 Sewage Disposal System Revenue Requirement Update

15. Updated Sewage Disposal System FY 2010-11 Revenue Requirements • Projected Revenues have been decreased • DWSD’s intention is to begin billing OMI District for Flows measured at single meter upstream of Northeast Pump Station • Initial technical data had indicated additional flow would accrue • Technical data needs additional review • At Sewer Rates Work Group’s request, FY 2010-11 Sewer Rates will not anticipate the increase pending further review Page 15

16. Updated Sewage Disposal System FY 2010-11 Revenue Requirements • Budgeted operating expenses in financial plan for rates reduced by 2% • Reflects Management’s expectations regarding outcomes of strategic process • Reflects desire to offset negative rate consequences of revenue reduction noted above • Debt Service Coverage mildly reduced • Reflects fact that some implementation of FY 2007-08 and FY 2008-09 Look-Back will count as FY 2010-11 revenue Page 16

17. FY 2010-11 Budget Target – Combined Water & Sewer Page 17

18. Sewage Disposal System Preliminary Revenue Level – December Projection Page 18

19. Sewage Disposal System Preliminary Revenue Level – Proposed Projection Page 19

20. Preliminary Sewer Rate Level – Increase Drivers Page 20

21. Updated Allocation of FY 2010-11 Sewage Disposal System Revenue Requirements to Customers

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

23. Wet Weather Inflow CalculationsSuggested WWWG Changes • Deduct Dry Weather Flow from Total Annual Flow to Determine Wet Weather Volume • Compute Inferred “Delivery Coefficient” • Recalculate Overflow Credit Factor(s)? • Estimating Techniques for System Meter Customers? • Understand/Reflect Differential Flow Quality Issues? Page 23

24. Utility Basis for FY 2010-11 Sewer Rates • Benefits include: • More reliable and stable source for capital cost allocation • Better “generational equity” alignment with cost recovery and use of assets over their useful life • Per 1978 Rate Settlement Agreement, no differential in rate of return between Detroit and Suburban customers • Reflects detailed review of DWSD’s Fixed Asset records Page 24

25. Sample Capital Cost Recovery for DWSD Infrastructure Investment Page 25 * Includes principal, interest, and debt service coverage ** Includes depreciation expense and return on rate base

26. Conversion of FY 2010-11 Revenue Req’ts to Utility Basis – ($millions) Page 26

27. Preliminary ProposedFY 2010-11 Sewer Rates

28. Proposed Rates for FY 2010-11Minor Rate Calculation Change • Vetted by Sewer Rates Work Group • Fixed Monthly Charge component includes recovery of “Wholesale Only” costs related with: • Master Meters • Customer Outreach Support • Previously collected through commodity element • Results in lower commodity rates, higher fixed monthly charges Page 28

29. Next Steps • Rates will become “proposed” when submitted to Board of Water Commissioners • Formal notification will be mailed • Ongoing review of all revenue requirement, cost of service allocation, and rate design calculations • Next meetings • Immediately following – Sewer Rates Work Group • February 24, 2010 – Board of Water Commissioners Public Hearing on Proposed FY 2010-11 Water Rates Page 29

30. Takeaways • DWSD announces a reduced preliminary estimate of Overall SYSTEM Revenue Increase from 7.4% to 6.8% • DWSD has presented preliminary proposed rates for FY 2010-11 • Proposed rates remain under review Page 30

31. Sample Sewer Rate Calculation

32. Determine Units of Service • Wastewater Volume • Sanitary • Dry Weather Infiltration/Inflow • Wet Weather Flows • Uniform Overflow Credit • Wastewater Strength • Industrial Surcharge Customers • All Other “Domestic” • Detroit CSO Facilities • 83% Detroit • 17% Suburban • Detailed Allocation Page 32

33. Wastewater Volume (Domestic Strength) Industrial Specific CSO Collection System Specific Allocate Costs to Functions Page 33

34. Allocate Costs to Customers • Determine Unit Costs of Service • Divide Functional Costs by Units of Service • Apply Uniform Unit Costs of Service to Customer Specific Units of Service Page 34

35. Recognize Settlement Agreement Adjustments Page 35

36. Calculate Rates • Commodity Charge • Recovers Costs Associated With: • Sanitary Volume • Dry Weather Infiltration/Inflow • Fixed Monthly Charge • Recovers Costs Associated With: • Wet Weather Flow • Customer Specific Costs • Detroit CSO Program • Wholesale Only Costs Page 36