1 June 26, 2014

2 Where we are today…

3 Today’s Agenda Recap of Meeting No. 12 Overview of Preliminary Rate Analysis Cost Allocation Inputs Cost of Service Analysis Next Steps

4 Recap of Meeting No. 12

5 Rate Setting Process is for 5-yr period, but longer-term outlook is meant to smooth future rate increases

6 Revenue Requirements to be initially based on 51,700 AF (Groundwater) 51,700 AF is the 5-yr rolling average and consistent with existing rate/budget assumptions

7 Rate smoothing is preferred by AHFC, rather than larger initial increases Larger, Initial IncreasesRate-Smoothing

8 Overview of Preliminary Rate Analysis

9 Provisional assumptions were utilized to develop preliminary rates Revenue Requirements Assumptions: – Rate Smoothing – BMP Funding (no other capital projects) Financing Assumptions: – 1999 COP and 2007 COW debt refinancing 2007 refinancing includes use of $12M in awarded Title XVI – $900,000 in grants Demand Assumptions: – Groundwater demand of 51,700 AF Conservation 500 AF per year until target is met – Delivered Water demand of 5,500 AF 2010 Cost Allocation Methodology Foundation

10 Cost Allocation Inputs

11 Draft 2015 Cost allocation methodology remains consistent with the 2010 rate setting process and the findings of Pendry-Griffith

12 Initial Five Year Rate Impact under proposed increases (5% annual revenue increases) Inside DWZ vs. outside DWZ, avg difference is $47/af Outside DWZ vs. rural residential, diff is $9/af Inside DWZ vs. delivered water charge, difference is $97/af *Rural Residential users charged 60% of an AF

13 Two critical guiding definitions to the Cost Allocation Analysis 1.Cost Allocations must be based on a quantifiable benefit, supported by system attributes and costs 2.Single Basin = Shared Challenges = Shared Solution “All persons extracting water and paying the charge will benefit in the continued availability of usable groundwater.” - Pendry-Griffith Decision

14 Revenue Needs Administration Facility Operations Harkins Slough Coastal Distribution Supplemental Wells Recycled Water Facility Metering Program Basin Management Capital Planning Debt Service Payments SWRCB Note#1 SWRCB Note#2 DWR (Prop. 13) 1999 COP City of Watsonville Future Debt Service Augmentation Charge (Aug) Inside DWZ Surcharge (+DWZ) Rural Residential (Rural) Delivered Water Service (DWS) Cost of Service Analysis used to allocate Revenue Requirements to rate categories Cost of Services Analysis

15 Changes to budget and water demands cause minor shifts from 2010 analysis

16 Various allocation bases used to distribute revenue requirements between functions ExpendituresAllocation Basis AugAug Inside RuralDWS Administration 82%82% + 3%4%11% Estimated percent of time the position spent on that function Facility Operations Harkins Slough, CDS, Supplemental Wells, Recycled Water Facility 71%71%+ 0%2%27% Cost to pump at pressure allocated to Delivered Water Users Remaining operating costs allocated on the ratio of the groundwater and delivered water consumption to total consumption Metering Program 89%89%+ 0%0%11% Allocated directly to Metering

17 Various allocation bases used to distribute revenue requirements between functions ExpendituresAllocation Basis AugAug Inside RuralDWS Basin Management Planning Modeling & Monitoring, Basin Management, & Basin Funding 87%87% + 0%2%11% Ratio of the groundwater and delivered water consumption to total consumption Debt Service Payments SWRCB Note #1, SWRCB Note #2, & 1999 COP, Coastal Distribution System, City of Watsonville – Recycled Water Facility 82%82% + 3%2%13% Ratio of consumption and available capacity. The amount of available (or standby) Delivered Water Service capacity is directly allocated to Inside DWZ users

18 Initial Five Year Rate Impact under proposed increases (5% annual revenue increases) Inside DWZ vs. outside DWZ, avg difference is $47/af Outside DWZ vs. rural residential, diff is $9/af Inside DWZ vs. delivered water charge, difference is $97/af *Rural Residential users charged 60% of an AF

19 Next Steps

20 Where are we going…

21 Next Steps – Rate Design & Development (July) – Finalize revenue requirements based on ongoing refinements to financial assumptions Potential clarity of grant and financial assumptions – Discussion of Proposition 218 Process (August)

22 Questions?

23 Extra Slides

24 Initial Five Year Rate Impact under proposed increases (5% annual increases) Unit Cost Per User Class 5-yr Impact Augmentation Charge - Outside DWZ29% Augmentation Charge - Inside DWZ32% Augmentation Charge - Rural Residential26% Delivered Water Charge10%

25 Summary of Cost of Service Analysis Augmentation Charge Inside DWZ Rural Residential Delivered Water Administration82%3%4%11% Facility Operations Harkins Slough60%0%2%38% Coastal Distribution74%0%2%24% Supplemental Wells87%0%2%11% Recycled Water Facility70%0%2%28% Metering Program89%0% 11% Basin Planning87%0%2%11% Capital Planning82%3%2%13% Debt Service Payments SWRCB Note#182%3%2%13% SWRCB Note#282%3%2%13% DWR (Prop. 13)82%3%2%13% 1999 COP82%3%2%13% City of Watsonville82%3%2%13% Future Debt Service82%3%2%13%

26 Cost of Service Analysis is the method by which revenue requirements are allocated to each customer class Functional Allocation Separates expenditures into functional categories Cost Allocation Assigns costs to customer classes in proportion to the respective demands

27 Revenue requirements are allocated to five unique service functions provided by the Agency (Functional Allocation) Functional CategoryWater Users Receiving Service Supplemental Water Service for Groundwater Users Property Owners with Metered and Unmetered Wells Delivered Water ServiceDelivered Water Users Billing Water Users on a Quarterly Cycle and Unmetered Users billed Annually Metering All Water Users Except for Property Owners with Unmetered Wells Higher Level of Service for Metered Water Users DWZ GW Users Within the DWZ with Ability to Immediately Connect to the CDS

28 Alternative Cost Allocation

29 Initial Five Year Rate Impact under proposed increases (5% annual revenue increases) Inside DWZ vs. outside DWZ, avg difference is about $45/af Outside DWZ vs. rural residential, difference is about $10/af Inside DWZ vs. delivered water charge, difference is about $115/af *Rural Residential users charged 60% of an AF

30 Various allocation bases used to distribute revenue requirements between functions ExpendituresAllocation Basis Aug+DWZRuralDWS Administration 82%0%4%14% Estimated percent of time the position spent on that function Facility Operations Harkins Slough, CDS, Supplemental Wells, Recycled Water Facility 71%0%2%27% Cost to pump at pressure allocated to Delivered Water Users Remaining operating costs allocated on the ratio of the groundwater and delivered water consumption to total consumption Metering Program 79%0% 21% Allocated directly to Metering

31 Various allocation bases used to distribute revenue requirements between functions ExpendituresAllocation Basis Aug+DWZRuralDWS Basin Management Planning Modeling & Monitoring, Basin Management, & Basin Funding 87%0%2%11% Ratio of the groundwater and delivered water consumption to total consumption Debt Service Payments SWRCB Note #1, SWRCB Note #2, & 1999 COP 87%0%2%11% Ratio of the groundwater and delivered water consumption to total consumption Debt Service Payments Coastal Distribution System 0%53%0%47% Ratio of delivered water and metered water user consumption in the DWZ Debt Service Payments (modified) City of Watsonville – Recycled Water Facility 79%5%2%14% Ratio of existing debt service payments

32 Summary of Cost of Service Analysis Augmentation Charge Inside DWZ Rural Residential Delivered Water Administration82%0%4%14% Facility Operations Harkins Slough60%0%2%38% Coastal Distribution74%0%2%24% Supplemental Wells87%0%2%11% Recycled Water Facility70%0%2%28% Metering Program79%0% 21% Basin Planning87%0%2%11% Capital Planning79%5%2%14% Debt Service Payments SWRCB Note#187%0%2%11% SWRCB Note#287%0%2%11% DWR (Prop. 13)0%53%0%47% 1999 COP87%0%2%11% City of Watsonville79%5%2%14% Future Debt Service86%0%2%11%