City of Fernley, Nevada – 164 th Ave. NE, Suite 300, Redmond, WA April 18, 2007 Rate Study Findings Water and Sewer Utility Rates & Connection Charges W A T E R S E W E R 

Page 2 Presentation Outline Major Assumptions Recap of Fiscal Policies Revenue Requirement Results Connection Charge Results Cost of Service/Rates Questions

Page 3 Economic Assumptions Operations-related cost inflation: 3% Capital construction cost escalation: 4% Labor cost inflation: 4% Benefit cost inflation: 5.5% Interest earnings on cash balances: 3% Annual customer growth: 10%

Page 4 Capital Funding Assumptions Connection charge revenues incorporate proposed level of charges Recommended internal policy: Maximum of 50% of connection charge revenues used to pay debt service; remaining used to directly fund capital projects (mitigates risk of growth not occurring as planned)  Phased-in for water utility  Fully implemented for sewer utility State Bond Bank used as debt financing mechanism Interest rate: 5.25% Term: 30 years Coverage requirement: Annual revenues net of O&M must equal 1.0 times debt service (including connection charge revenues used to pay debt service)

Page 5 Fiscal Policies 1.Operating Reserve oTo ensure that adequate working capital to accommodate fluctuations in the timing of expenditures and revenues oMaintain a minimum balance in the operating account, equal to 60 – 90 days of O&M for water, 45 – 60 days for sewer oSustained from rates PROPOSED

Page 6 Fiscal Policies 2.Capital Contingency oTo provide a source of funding for emergency repairs (other than catastrophic events), unanticipated capital expenditures, and project cost overruns oTo avoid large unexpected rate increases oMaintain a minimum balance in the capital account equal to 1% of fixed assets oSustained from capital revenues, system reinvestment funding, and excess operating revenues PROPOSED

Page 7 Fiscal Policies 3.System Reinvestment oTo ensure ongoing system integrity through reinvestment in the system oTo charge customers commensurate with the consumption of facility useful lives (rate equity) oTo maintain rate stability oWater: Annually fund from rates an amount equal to annual depreciation, less debt principal (50% funding achieved this study period) oSewer: Annually fund from rates an amount equal to annual depreciation expense (Fully funded) oHold in capital account to be spent on system replacement PROPOSED

Page 8 Fiscal Policies 4.Debt Service Coverage oTo ensure compliance with existing loan / bond covenants and maintain credit worthiness for future debt issuance oSet rates to maintain a coverage ratio of at least 1.00 for State Bond Bank debt service oConservatively includes only that portion of connection charge revenues assumed to pay debt service PROPOSED

Page 9 WATER UTILITY

Page 10 Water Growth Projections

Page 11 Water Capital Financing Plan $101.1 million (inflated) in planned capital projects FYE Developer-funded: $0.1 million (0.1%) Total debt proceeds: $81.3 million (80.4%) Total cash funding: $19.7 million (19.5%) $50 million bond proceeds received year prior to need; reflected in 2007 fund balance

Page 12 Water Operating Forecast Additional O&M costs added due to treatment plant $0.9 million in FY 2008/09 and $1.8 in FY 2009/10 Increase annually with inflation thereafter Other operating expenses increase annually with inflation

Page 13 Water Revenue Requirements Major cost drivers Additional treatment O&M costs System reinvestment funding Debt service not funded with connection charges

Page 14 SEWER UTILITY

Page 15 Sewer Growth Projections

Page 16 Sewer Capital Financing Plan $64.6 million (inflated) in planned capital projects Developer-funded: $0.1 million (0.2%) Total debt proceeds: $35.2 million (54.5%) Total cash funding: $29.3 million (45.4%)

Page 17 Sewer Operating Forecast Operating expenses increase annually with inflation

Page 18 Sewer Revenue Requirements

Page 19 Connection Charge Elements Existing Cost Basis (Existing System Facilities) Future Cost Basis (Capital Improvement Program) Measure of System Capacity (Customer Base) Proposed charge basis = equivalent residential capacity units (ERCs) Projected ERCs to be served by total system capacity

Page 20 Water Connection Charge

Page 21 Sewer Connection Charge

Page 22 WATER UTILITY Cost of Service / Rate Design

Page 23 Water Cost of Service Process Step 1 = Allocate total utility costs by function Water Utility Functions  Customer  Meters & Services  Base Demand (costs to provide average level of consumption)  Peak Demand (costs to provide peak usage/capacity)  Fire Protection Step 2 = Develop allocation factors using customer facility requirements and usage characteristics Step 3 = Allocate Costs to customer classes ** Industry Standard Methodologies; AWWA Principles of Water Rates, Fees and Charges, M1 Manual

Page 24 Water Costs by Function Step 1- allocate costs to functions – FYE 2008 ($2,722,649)

Page 25 Step 2- Develop allocation factors with customer facility requirements and usage characteristics Water Cost Allocations by Customer Class

Page 26 Water Costs by Customer Class

Page 27 Water Rate Structure Evaluation Charge per unit for SFR and MFR; charge per unit increasing with meter size for COM Eliminate per unit charge Design separate schedule of charges for SFR, MFR and COM classes  Benefits low water users and fixed income customers  Simplifies rate structure Existing StructureProposed ChangeBenefits Same schedule of charges for all customer classes Design class-specific charge  3 rd block targets high water users  Sends more effective pricing signals Base Charge Volume Charge Three-tiered volume charge for SFR; class-specific single block charge for MFR & COM Usage allowance of 10 kgal per unit per month Eliminate usage allowance  Recognizes difference in peak period usage  Recognizes class-specific fire flow requirements and can incorporate a portion of peak use cost (revenue stability)

Page 28 Water Rates Residential - Individually Metered Block 1 set equal to average winter use (53% of customer bills) Block 2 set equal to about 2 x average annual use (36% of customer bills) Block 3 targets high water users (11% of customer bills) Existing rate structure recovers 65% / 35% between base / volume charges Cost of service rate structure recovers about 35% / 65% from base / volume charges

Page 29 Water Rates Residential – Master Metered Existing rate structure recovers 90% / 10% base / volume compared to 25% / 75% in the cost of service rate structure

Page 30 Water Rates Commercial Existing rate structure (25% / 75% base / volume) recovers less more costs from the volume charge compared to the cost of service rate structure (20% / 80% base / volume)

Page 31 Sample Water Bills Customer with average usage of 14 kgal will see a $6 increase in their monthly bill under COS 2008 rates Customers over 30,000 gallons will experience increasingly higher bills under 2008 COS

Page 32 Sample Water Bills

Page 33 Sample Water Bills

Page 34 Sample Water Bills

Page 35 Sample Water Bills

Page 36 Sewer Utility Proposed Rates

Page 37 Sewer Rate Comparison

Page 38 Questions?