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City of Detroit Water and Sewerage Department

City of Detroit Water and Sewerage Department. Wholesale Customer Rates Meeting Water Supply System Meeting #2 – Projected FY 2010-11 Revenue Requirements November 19, 2009. Customer Rate Season Schedule. This is the second of a series of meetings

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City of Detroit Water and Sewerage Department

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  1. City of DetroitWater and Sewerage Department Wholesale Customer Rates Meeting Water Supply System Meeting #2 – Projected FY 2010-11 Revenue Requirements November 19, 2009

  2. Customer Rate Season Schedule • This is the second 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 TAC Work Groups

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

  4. Today’s Agenda • Preliminary Units of Service for FY 2010-11 Water Rates • Preliminary Revenue Requirements (And System Revenue) for FY 2010-11 • Introduction of Cost of Service Allocation Issues for FY 2010-11 Water Rates

  5. The 3 Fundamental Steps in the Water 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. FY 2010-11 Units of Service – Water Supply System

  7. Annual Flow Volumes • Use in Rate Model • Project revenue base • Establish demographic baseline for max day and peak hour demands • Allocate Commodity based costs customers • Chemicals, etc. • Theory • Certain costs are uniform regardless of how customers use water • Customers should be allocated these cots solely on the volume of commodity purchased Page 7

  8. Annual Flow VolumesMethod of Determination • For “New Contract” Customers • Use Volume in Contract • For “Old Contract” Customers • Review Historical Data • Project Rate Year Based on Regression Analyses, etc. • Transmit Projections to Customer Communities • Utilize Input from Customers Page 8

  9. Annual Flow Volumes • Summary of FY 2008-09: • SYSTEM ~ 13% Below Target • Sub Wholesale ~ 12% Below Target • Detroit Retail ~ 17% Below Target • More Conservative Projection Approach Established for FY 2009-10 Rates • Perhaps not conservative enough? Page 9

  10. Annual Water Sales – (mgd) Page 10

  11. Annual Suburban Wholesale Water Sales (mgd) Page 11

  12. Annual Suburban Wholesale Billed Volumes – (mgd) Page 12

  13. Annual Detroit Retail Water Sales (mgd) Page 13

  14. Annual Flow Volumes - Rate Planning Challenge • Annual Sales Volumes in new contracts do not reflect recent reduction in in actual sales volumes • Continuing to adhere to contract volumes may necessitate modifications in the rate development process Page 14

  15. Distance Factor • Use in Rate Model • Allocate to customers the costs of: • Major transmission system (big pipes) • Pumping (high lift pumps and booster stations) • Responsibility for Non-Revenue (Unaccounted for) Water • Theory • Customers further away from the water treatment plants: • Are using more of the pipes • Require more pumping power • Should pay a larger share of these costs Page 15

  16. Distance FactorMethod of Determination • Average distance from each WTP to a customer’s representative location (or “point of commerce”) • Definition of representative location • Meter location for customers with one meter • Customers with more than one meter = weighted (by meter capacity) average of average distance to each meter Page 16

  17. Distance Factor Method of Determination Change for 2011 • For “deduct meter” deduct meters will not be factored into average • Rather, distance for those meters will be equated to that of the “normal” DWSD master meter through which the flow passes Page 17

  18. Distance FactorCalculation Example Page 18

  19. Elevation Factor • Use in Rate Model • Allocate costs of pumping (high lift pumps and booster stations) to customers • Theory • Customers with higher average elevation difference from the water treatment plants require more pumping power and should pay a larger share of these costs Page 19

  20. Elevation FactorMethod of Determination • Average elevation difference from each WTP to a customer’s representative location (or “point of commerce”) • Definition of representative location • Meter location • Customers with one meter = meter elevation • Customers with more than one meter = weighted (by equivalent meter) average of average elevation difference to each meter Page 20

  21. Elevation FactorCalculation Example Page 21

  22. Elevation Factor Method of Determination Change for 2011 • For “deduct meter” deduct meters will not be factored into average • Rather, elevation for those meters will be equated to that of the “normal” DWSD master meter through which the flow passes Page 22

  23. Status Update - Elevation Factor Investigation by TAC Water Rates Work Group • Water Rates WG explored concept of augmenting weighted meter elevation with a “Hydraulic Grade Line” factor to incorporate delivery pressures into cost allocation of pumping costs • No consensus to recommend change at this time – continue to review • Pressure ranges in contracts may spur a change Page 23

  24. Customer Max Day and Peak Hour Demands • Use in Rate Model • Allocate costs of low lift pumping, treatment, and storage (and capital costs of large pipes) to customers • Theory • Customers that place higher max day and peak hour demands on the System require additional facilities and operating requirements and should pay a larger share of these costs Page 24

  25. Customer Max Day and Peak Hour Demands – Method of Determination • For “New Contract” Customers. . . • Use Demands in Contract • For other Customers • Seven years of history establishes proxy • Use absolute highest community max day and community peak hour on DWSD’s max day (exclude midnight to 6 am) • Adjust uniformly (20% increase) to reflect recent absence of extraordinary demand conditions • Adjust relative to projected volume to reflect demographic conditions Page 25

  26. Evolution of Contracted Customer Demands • As of January 23, 2009 (cut off date for FY 2009-10 rate study) 32 Customers had negotiated new contracts under the Model Contract • Contract Demands were prospectively reflected in FY 2009-10 rate calculations • FY 2008-09 rates were reviewed and modified as necessary • Through June 30, 2009, an additional 16 communities had negotiated new contracts • FY 2008-09 rates were reviewed and modified as necessary • FY 2009-10 rates were reviewed and modified as necessary Page 26

  27. Evolution of Contracted Customer Demands (continued) • Since July 1, 2009 an additional 8 Customers had negotiated new contracts • FY 2009-10 rates were (or are being) reviewed and modified as necessary • As we stand here today, 56 communities have negotiated new contracts, and one has been consolidated, meaning that 29 communities remain under the old contract • Contracts approved prior to December 15, 2009 will be prospectively reflected in FY 2010-11 rate calculations • After that date new demands will be reviewed and rate will be modified if necessary Page 27

  28. Summary Review of Demand Data – System Demands Page 28

  29. Summary Review of Demand Data – Customer Demand Proxies Page 29

  30. Summary Review of 2009 Demand Data Page 30

  31. Summary Review of 2009 Demand Data • Number of “old contract” Customers that experienced new recent high demands in Summer 2009 that increased their proxies = 0 • Potentially two exceedances of contract demands by “new contract” customers • Under review by the TAC Analytical Work Group • Overall System Demands lowered to reflect reduction in total production Page 31

  32. FY 2010-11 Revenue Requirement Levels – Water Supply System

  33. Preliminary Revenue Requirement Planning • DWSD has established preliminary revenue requirements for FY 2010-11 • Meeting these revenue requirements will require a revenue (System rate) increase • Current planning is being refined, and the precise amount of that increase is not yet known • Today DWSD is presenting information that reflects the approximate mid-point of a range of possible outcomes Page 33

  34. Rate Development Challenges for FY 2010-11 • Availability of Historical Financial Data • In a perfect year, we’d have audited results for FY 2008-09 to help guide assumptions, etc. • Won’t be available until ???? • Audited figures for FY 2007-08 were expected Spring 2009 • Still not yet finalized Page 34

  35. Mechanics Associated with Establishing Revenue Requirement Levels Cash Requirements Accrual Requirements Coverage Req’ts (RATES) (FINANCIAL STATEMENTS) (BOND COVENANTS) Depreciation Expense X% of Debt Service Principal & Interest Revenue Financed Capital Reserve Deposits Debt Service Principal Debt Service Principal Debt Service Interest Debt Service Interest Debt Service Interest Operation and Maintenance Operation and Maintenance Operation and Maintenance Page 35

  36. PRELIMINARY FY 2010-11 Water Revenue Requirements ($millions) Cash Requirements Accrual Requirements Coverage Req’ts (RATES) (FINANCIAL STATEMENTS) (BOND COVENANTS) TOTAL = $366.6 TOTAL = $358.2 TOTAL = $366.6 Covg = $39.0 (Ratio = 1.24) RFC = $37.1 Depr = $75.4 Rsrvs = $1.9 Prin = $44.8 Prin = $44.8 Int = $119.5 Int = $119.5 Int = $119.5 O&M = $163.3 O&M = $163.3 O&M = $163.3 Page 36

  37. Operation and Maintenance Expense Budget • Budget Request Under Review • Enhanced strategic review process • Process will extend beyond rate development season • Budget for Purposes of Rate Development reflects overall target based on review of preliminary request and preliminary FY 2008-09 actual • Target may be adjusted as rate development process proceeds • Reflects revised allocation of fringe benefits from water to sewer Page 37

  38. Recent DWSD Operating Expenses – Combined Water & Sewer Page 38

  39. FY 2010-11 Budget Target – Combined Water & Sewer Page 39

  40. FY 2007-08 O&M Expense – Water and Sewer Portions Page 40

  41. DWSD Strategic Cost Reduction Program for FY 2010-11 Budget Aug 09 Dec 09 Feb 10 Mar 10 Apr 10 May 10 July 10> Ongoing Page 41

  42. Capital Financing Plan • Existing Funds, augmented by projected revenue transfers, sufficient to finance CIP through June 2011 • No issuance of additional debt anticipated to be supported by FY 2010-11 rates • Debt service increase reflects initial principal amortization of 2006 Bonds Page 42

  43. DWSD Debt Service – Fund Water CIP thru 2013 (last year) Page 43

  44. DWSD Debt Service – Fund Water CIP thru 2014 (this year) Page 44

  45. Water Supply SystemPreliminary Revenue Level Page 45

  46. Preliminary Water Rate Level – Increase Drivers Page 46

  47. Cost Allocation to Customers Status Report • Final Budget Request Modifications • Determination of Final Revenue Requirement Level • Specific operating cost allocations • Ongoing Review of FY 2007-08 and FY 2008-09 Financial Data • Specific operating cost allocations • Allocation of fixed asset data • Determination of capital structure • Projected depreciation rates • Rate of return • Ongoing review of Customer Demands • AWG meeting • Review of potential means to address disconnect between annual volumes in contract and expected water sales Page 47

  48. Water Cost of Service/Rate Design Issues - FY 2010-11 • Fixed / commodity wholesale rate structure • Disconnect between contract volumes and expected water sales • Meaningful portion of cost recovery not approved by TAC • Modify volumes? • Compensate for risk via rate of return • Overall System MD/PH Demand for allocation, given decline • Commitment to Potential Look-Back on FY 2010-11 Performance • Pilot analyses applied to FY 2008-09 and 2009-10 results Page 48

  49. Next Steps • Rate Development Process will continue • TAC Water Rates Work Group meeting on December 2 • Next roll-out meeting • December 17 – Intent is to Present Preliminary FY 2010-11 Revenue Requirement Allocations to Customers Page 49

  50. Takeaways • DWSD Has Announced a Preliminary Overall SYSTEM Revenue Increase RANGE of 6% to 10% • Review is Ongoing and this May Change • IMPACTS ON INDIVIDUAL CUSTOMERS HAVE NOT BEEN DETERMINED • IT IS NOT ACCURATE TO ASSUME THAT ALL RATES ARE GOING TO BE INCREASED BY THIS RANGE • Contract Negotiation “Deadlines” • Dec 15 for Dec 17 Presentation • Jan 15 for Jan 21 Proposals • Dec 11 for Other Units of Service Page 50

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