Water Rate Presentation City Council Meeting December 14, 2010

2 Current Situation  No Internal Rate Increase Since 1995 to fund system maintenance and capital improvements  Only Increases-Pass Through Adjustments to Offset Higher Water Supply Costs  Continuing Decline in Water Sales and Reduced Sales Revenues

Water Rate Study/Rate Design Process  Step 1 – Financial Planning  Step 2- Establish Cost of Service  Step 3- Rate Design and Rate Structure

Water Rate Recommendations  Five Year Rate Adjustment Proposal Commodity (Quantity) Adjustment FY 2011FY 2012FY 2013FY 2014FY 2015 Internal Increase 6.5 % CPI Pass Through (Water Cost) 4 %TBD  Adjustments to Fixed Meter Charges based on COS  Conservation based Tiered Rate Structure  Revise Pass Through Mechanism in accordance with Rate Model

Proposed 2011 Rates ( 1st year 6.5% Internal Increase + 4% Pass-Through ) Single Family Monthly Use ccf Current Commodity $ 2.655/ccf Proposed Internal $ ccf Pass Through $/ccf Total Proposed $/ccf Tier 1 8$ 2.33$ 0.12$ 2.45 Tier 2 14$ 2.92$ 0.12$ 3.04 Tier 3 24$ 3.64$ 0.12$ 3.76 Tier 425 and Over $ 4.52$0.12$ 4.64 Other Customers Tier 1 10$ 2.33$ 0.12$ 2.45 Tier 211 and Over $ 2.97$0.12$ 3.09 *Low Income Senior and Disabled Rate also remains in Effect

6 Allocation of Internal Rate Increase Reduced Sales 4% Maintenance Expense 27% Infrastructure/ Replacement Improvement 45% Bond Debt - New Wells 20% Reserves 4%

Single Family Residence Monthly Bills 7 Monthly Bills with pass through

Comparison of Water Rate Charges (Proposed Effective ) 8 * City of Torrance Proposed Rates are based on 6.5% internal and pass through increase

Proposition 218 Process  Public Notification Mailed to all TMW Water Customers  Protest Ballot Included in Notification for Customers who wish to file Opposition to Increase  If less than 50% of Customers file Protest, Water Rate Proposal may go forward  Public Hearing on for Council Decision on Rate Proposal  If Council Approves New Rates Effective

Supplemental Charts

Cost of Service Study 12 Rate study is consistent with industry standards as outlined by the American Water Works Association – Conforms to Proposition 218 requirements

Water Usage Characteristics Based on FY 2010 actual usage 13

Current Needs  Provide for System Infrastructure Replacements and High Priority Improvements  Fund Local Water Supply Projects to Lower Water Costs and Enhance Reliability  Fund Operations & Maintenance  Meet Regulatory Requirements  Revise Pass-Through Adjustment Methodology to more Accurately Reflect Changes in Water Costs

Recommended Option FY 2011 Rates ( 6.5% Internal Rate Increase Plus 4.0% Water Cost Pass-Through) 15

Monthly Fixed Service Charge 16

Capital Improvement Project - CIP Proposed Bond: 22.5 million in FY 2012 Total CIP: Approx. $34.2 million over next five years Major Capital Expenses: Well Development approx. $22.5 million Main Improvement approx. $ 9.0 million Other System Improvements $ 2.7 million 17

18 Proposed Internal Rate Adjustments Note: CPI Assumed at 2.5% FY 2011 (3/1/11) FY 2012 (1/1/12) (1/1/12) FY 2013 (1/1/13) (1/1/13) FY 2014 (1/1/14) (1/1/14) FY 2015 (1/1/15) (1/1/15) Internal Rate % Increase (does not include Pass-Through) Pass-Through)6.5%6.5%CPICPICPI

Total Reserves – Recommended Option 19 * Total Unrestricted Reserves FY 2011 FY2012 FY 2013 FY 2014 FY 2015 Internal Rate6.5% 6.5% CPI CPI CPI % Increase

Conservation Based Tiered Rates  Promotes Long Term Conservation to Stretch Limited Water Resources  Provides Customers Incentive to Conserve - the Less you Use the Lower the Rate  Ave Single Family Customer at 14ccf/mo Increase is only 3.5%  Meets Conservation BMP’s  Helps Achieve 2020 Water Use Requirements

Economic Benefit of New Wells Benefit/Cost Ratio 5 Lifecycle Savings $180 mil Break Even Year 2016

TMW Recommendations  Recommend Implementation of Internal Increases of 6.5%-6.5%in 2011 and 2012 and CPI Increases in 2013, 2014 and 2015  Effective Date of increase  Recommend Conservation Rate Structure - 4 Tier for Single Family; 2 Tier for Other Customers  Recommend Adoption Revised Pass Through Method to Offset Increases in Water Cost

Alternative Scenarios

Total Reserves – Alt. Scenario A 24 * Total Unrestricted Reserves FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 Internal Rate 6.0% 6.0% CPI CPI CPI % Increase

Total Reserves – Alt. Scenario B 25 * Total Unrestricted Reserves FY 2011 FY2012 FY 2013 FY 2014 FY 2015 Internal Rate 5.5% 5.5% CPI CPI CPI % Increase

Operating Financial Plan 26