CC - Agendas - City Council - REGULAR - 8/14/2018

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9.H.a City of Prescott, Arizona Water and Wastewater Rate Study We will examine each utility's financial activity through an operations sub -fund and DIF sub -funds. The operations sub -fund tracks those activities associated with annual operating revenue and revenue requirements including recurring O&M expenses, non -growth -related debt service, cash funded capital, miscellaneous non -rate revenues, and operating fund cash reserve requirements. The DIF sub -funds track each of the respective utility service areas associated with funding DIF eligible capital projects. This includes DIF revenue, other growth -related revenues (if any), bond issues, and contributions or in -lieu of payments for capital projects. The DIF subfund cash flow analysis will show the ability of these sources to meet the capital requirements. The City's water and wastewater financial planning models will be reviewed. Building on the City forecast, we will develop a 10-year planning horizon for the water and wastewater utilities from FY 2018-19 through FY 2027-28 Study Period. Rate adjustments are anticipated to be effective in January each year, starting in 2019, consistent with City practice and typical timing of rate adjustments. The structure of our financial plan model will allow users to conduct what -if scenarios using an easy to manage dashboard interface. The development of the water and wastewater financial plans involve several steps which are discussed next. Raftelis will examine usage patterns from historical water and wastewater billing records. Using this data billing data and other planning documents, we will project customer accounts, consumption, and rate revenue for the Study Period under the current rate schedules. We will adjust projections for customer growth and anticipated changes in usage per account. We will use City customers' historical usage characteristics as a proxy for future billable water sales and wastewater volume sales. We will complete a bill distribution analysis to study the historical water consumption of the City's different customer types. This information will be included in both the task 2 financial plan as well as the task 4 rate design rate structures alternatives analysis when setting tiered rates and analyzing customer impacts. This historical billing analysis will serve as the basis for evaluating the City's projections of water and wastewater consumption and revenue forecasts. We will also work with City staff to review anticipated strength concentrations by characteristic anticipated at the water reclamation facility as well as evaluating domestic and higher strength concentrations by non-residential customer classification. Raftelis will project a 10-year forecast of revenue requirements over the Study Period which will include an evaluation of the direct and indirect O&M expenses, capital costs (including pay-as-you-go capital and debt service), user rates including the APF and alternative water surcharge and other miscellaneous revenues. The financial planning scenarios will show the level of rate revenue adjustments needed to meet annual revenue requirement over the Study Period, satisfy debt service coverage and meet cash reserve requirements. Raftelis will evaluate the City's assumptions related to inflation, and historical expense trends within the 10-year Study Period and provide potential alternative projection assumptions based on our experience in developing these assumptions with other utilities in Arizona and across the United States. We have included up to four (4) financial planning scenarios for each utility. Scenarios may be developed to evaluate the impact to annual revenue requirements associated with varying growth levels, capital project requirements and/or capital funding alternatives or other major variables affecting water and wastewater revenues. Major capital projects are typically financed with a combination of long-term debt and cash either source through cash reserves, DIFs, and/or annual rate revenues. Our financial plan analysis will evaluate the various levels of rate revenue and debt funding to maintain low, smooth and predictable revenue adjustments. We will include any outstanding loan obligations and the City's as well as the impact to debt service coverage on any proposed debt. Attachment: Raftelis Scope of Work -Prescott DIF and Rate Study (2124 : Rate & Fee Study Contract with Raftelis) RAFTELIS Water and Wastewater Utility Rate Study - Attachment Page 3 Packet Pg. 252