1. DROUGHT PRICING – LESSONS LEARNED A Presentation to 2003 RMSAWWA / RMWEA Joint Annual Conference by Kerry Kuykendoll Manager of Rate Administration Denver Water September 14, 2003

2. DENVER WATER BACKGROUND Denver Water provides water to approximately 1 million people. Denver Water provides water to approximately 1 million people. Customers are located both inside and outside city boundaries. Customers are located both inside and outside city boundaries. Customer groups include residential, commercial, industrial, government and wholesale. Customer groups include residential, commercial, industrial, government and wholesale. Water supply is 100% surface water. Water supply is 100% surface water. Reservoirs fill with spring runoff. Reservoirs fill with spring runoff. Snow pack is critical. Snow pack is critical.

3. -334 MI 2 -77 Distributors

5. DROUGHT: “I’LL KNOW IT WHEN I SEE IT.” Denver Water had revised its Drought Response Plan in July 1997. Denver Water had revised its Drought Response Plan in July 1997. The worst 100-year drought occurred 1953- 1955. This one beats it in intensity. The worst 100-year drought occurred 1953- 1955. This one beats it in intensity. Snow pack in the winter of 2001/2002 was 63% of normal. Storage was average. Snow pack in the winter of 2001/2002 was 63% of normal. Storage was average. Spring runoff was 25% of normal. Precipitation was 33% of normal. Spring runoff was 25% of normal. Precipitation was 33% of normal. Other communities started declaring drought in early spring. Denver Water did not until two months later. Other communities started declaring drought in early spring. Denver Water did not until two months later.

6. 5/27/2003

7. Average = 296,000 af 2002 = 63,000 af (21% of average) Example of Mother Nature’s irregularity.

8. Reservoir Contents

9. FINANCING RESPONSE: In-Drought Concerns Utility’s Perspective Utility’s Perspective Commissioners’ Perspective Commissioners’ Perspective Customers’ Perspective Customers’ Perspective Post-Drought Concerns Financing Concerns Financing ConcernsSummary Lessons Learned Lessons Learned

10. FINANCING RESPONSE - UTILITY’S PERSPECTIVE Limited to no guidance available. Limited to no guidance available. Managing revenue shortfalls and reserve balances. Managing revenue shortfalls and reserve balances. Price signals – do they work? Price signals – do they work? –Price elasticity of demand. –Billing frequency. –How high is meaningful? –Can you develop a cost justification for drought pricing? Accountability – how much, from whom, how used? Accountability – how much, from whom, how used? What is feasible – billing limitations. What is feasible – billing limitations.

11. FINANCING RESPONSE – COMMISSIONERS’ PERSPECTIVE There is a relationship between price and demand. There is a relationship between price and demand. Control demand first and worry about fairness second, or vice versa? Control demand first and worry about fairness second, or vice versa? Accountability – not for lost revenue, used to pay for “unbudgeted” drought. Accountability – not for lost revenue, used to pay for “unbudgeted” drought. Do it now but have public input. Do it now but have public input. They hear all the individual concerns. They hear all the individual concerns.

12. FINANCING RESPONSE – CUSTOMERS’ PERSPECTIVE Inside Denver – Charge outside Denver – the water is ours. Inside Denver – Charge outside Denver – the water is ours. Outside Denver – Our rates are already higher than inside. Outside Denver – Our rates are already higher than inside. All – Indoor water, trees and shrubs should not be penalized. All – Indoor water, trees and shrubs should not be penalized. Some - Some - –I have 10 kids. –I am on a fixed income and like to garden. –I have an acre of land. –We provide park area to the public. –We use your water in production of our product (beer and bottled water). Bottom Line – Customers support a drought price signal but none of them personally used too much and their needs were not wasteful. It was someone else who wasted. Bottom Line – Customers support a drought price signal but none of them personally used too much and their needs were not wasteful. It was someone else who wasted.

13. WHAT WE DID! Originally “basket” of programs, based on restrictions, supported by surcharges and enforced by penalties. Originally “basket” of programs, based on restrictions, supported by surcharges and enforced by penalties. Then summer surcharges became a “belt and suspenders.” Then summer surcharges became a “belt and suspenders.” –Residential – 8 increasing blocks with range of 50% to 500% increase in rate. (Replaced “sissy” surcharge). –Commercial/Industrial/Government/Master Meter – 70% targets relative to 2001. –Aggregated Customers – 80% targets relative to 2001. Similar entities (e.g. Denver Parks) were combined to allow for management of the entire system.

14. $1.58 $2.37 $1.90 IndoorOutdoor WaterLarge Outdoor UserExcess Outdoor Use Residential Drought Surcharge Surcharge = $11.85 Total = $14.22

15. Summer Surcharges by Cycle

16. % of Customers Receiving a Surcharge 10 – 20%

17. Summer Surcharges by Cycle % of Customers Receiving a Surcharge 10 – 20% 20 – 40%

18. Summer Surcharges by Cycle % of Customers Receiving a Surcharge 10 – 20% 20 – 40%

19. Summer Surcharges by Cycle % of Customers Receiving a Surcharge 10 – 20% 20 – 40% 40 – 60%

20. Summer Surcharges by Cycle % of Customers Receiving a Surcharge 10 – 20% 20 – 40% 40 – 60% 60 – 80%

21. Summer Surcharges by Cycle % of Customers Receiving a Surcharge 10 – 20% 20 – 40% 40 – 60% 60 – 80% 40% 70%

22. Summer Surcharges by Cycle % of Customers Receiving a Surcharge 10 – 20% 20 – 40% 40 – 60% 60 – 80% 79% Highest percentage of customers Receiving a surcharge in one cycle?

23. Summer Surcharges by Cycle % of Customers Receiving a Surcharge 10 – 20% 20 – 40% 40 – 60% 60 – 80%

24. Summer Surcharges by Cycle % of Customers Receiving a Surcharge 10 – 20% 20 – 40% 40 – 60% 60 – 80%

25. 2003 Budget Review ItemFinancialPlanBudgetEst.Actual Sources Water Sales SDCSurcharges Bond Proceeds OtherTotal1522304016231$13324153122225$12517129227273 Uses O&MCapital Debt Service Total10113334268$10811234254$11011835263 Use of Cash -37-2910

26. Post Drought: Financing Concerns Additional costs largely offset by surcharges but not completely Additional costs largely offset by surcharges but not completely A renewed awareness of water and price A renewed awareness of water and price –General opinion that it is a high value and low price product –There are questions of whether our water is under priced –Not all uses are equally elastic There is a desire to avoid the consequences of lack of supply in the future. As a result the Board: There is a desire to avoid the consequences of lack of supply in the future. As a result the Board: –Accelerated the completion of the Recycle Project –Accelerated the timing of the North End Supply Project

27. Accelerating Capital Projects 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ($ Millions) $140 130 120 110 100 90 80 70 60 50 40 30 2003 Plan 2004 Plan Change 1: Acceleration of Recycled Distribution System 2004 Recycle Impact 2004 North End Sol. Impact Change 2: Acceleration of North End Solution 2004 Other Means Financing More and Sooner

28. Accelerating Capital Costs 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ($ Millions) $140 130 120 110 100 90 80 70 60 50 40 30 2003 Plan 2004 Plan $44 $52 $68 $94 $123 $58 $32 $29$22 2004 – 10: Add $183 million 2011-12: Subtract $100 million Means Financing More and Sooner

29. Demand Changes After A Drought East Bay MUD’s Experience 242 “Normal” 219 “Normal” 199 “Normal” -35% -18% 1961 – 1976 Average = 242 1978 – 1987 Average = 219 Relative to Previous Period = Down 10% 1989 - Present Average = 199 Relative to Previous Period = Down 9% After each drought “EXPECTED” demand was no longer related to the past “NORMAL” demand This is not a function of restrictions but rather a fundamental change in usage

30. Denver Water’s Consumption Per Account Three periods of “normal” 297 286 263 1977 Drought Metering / Two Forks 1977 – 1990 Demand Down 4% 1990 – Present Demand Down 8% Denver Water has had similar fundamental changes in usage Thousand Gallons per Account

31. Revenue Forecast Issues If Consumption is at Pre-drought Levels with Existing Rates 2004 Consumption –pre-drought (thous. gallons) 87,500,000 Average 2003 Rate ($/thous. gallons) $1.77 2004 Revenue Without a Rate Adjustment $154,875,000 Consumption at Pre-drought Levels with PREVIOUSLY PLANNED RATE adjustments 2004 Consumption --pre-drought (thous. gallons) 87,500,000 Average 2004 Rate (3.5% Rate Increase) $1.83 2004 Revenue $160,125,000 Consumption is REDUCED and RATES are INCREASED MORE THAN PLANNED 2004 Consumption –Reduced 5% 83,125,000 Average 2004 Rate (5% increase) $1.86 2004 Revenue $154,613,000

32. Focus on 2004 Item Rate Increases of 5.4-percent Projected Revenue at Reduced Demand (demand reduction of 5%) ($ million) $155.0 Original Revenue Target ($ million) $160.1 Shortfall$5.1 Plan Adjustments: 2004 Inflation Reduction to 2% 2004 Inflation Reduction to 2% 2004 SDC Increase of 20-percent 2004 SDC Increase of 20-percent Unidentified 2004 Budget Reductions Unidentified 2004 Budget Reductions Total Adjustments Total Adjustments$2.0 1.9 1.9 1.2 1.2 5.1 5.1

33. LESSONS LEARNED Expect controversy. Expect controversy. Don’t simply raise rates, have a surcharge. This makes it easier to be accountable. Don’t simply raise rates, have a surcharge. This makes it easier to be accountable. Surcharge may need to change with seasons. Surcharge may need to change with seasons. If you bill in blocks that are fixed, expect an outcry for individualized billing; (number of people in house and lot size will be key variables.) Also called water budgets. If you bill in blocks that are fixed, expect an outcry for individualized billing; (number of people in house and lot size will be key variables.) Also called water budgets. Understand that customers may conserve and still be assessed a surcharge. Understand that customers may conserve and still be assessed a surcharge. Come to a consensus on the issue of managing to the average vs. the individual. Come to a consensus on the issue of managing to the average vs. the individual. Pray for rain and snow. Pray for rain and snow.

34. QUESTIONS AND ANSWERS