City of Farmersville, Texas Water and Wastewater Rate Study February 2011

2 Introduction Internal and External Issues Impacting Water and Sewer Utility Discussion of Projected Financial Performance Rate Study Results Estimated Rates Rate Design Options Monthly Impact of Estimated Rates Comparison of Monthly Charges Questions / Comments

3 Issues Impacting Utility The finances of a Public Utility are tracked in an “Enterprise” fund – it is a “Business-like” activity A service is provided, and a fee is charged The City Council is the “Board of Directors” of the business. Responsibilities include: Hiring the Chief Executive Establishing the service goals and objectives Ensuring financial integrity and solvency of the business

4 Issues Impacting Utility - External Legislative and Regulatory Requirements Texas Water Conservation Implementation Task Force Emphasis on Water Conservation and Implementation of Best Management Practices Texas Commission on Environmental Quality Regulatory Oversight Significant capital improvements required, particularly to the City’s sewer collection and treatment systems, to maintain compliance Regional Wastewater System - Phase I capital cost of approximately $3.475 million projected to meet needs through 2017 Increasing Costs from Wholesale Supplier (NTMWD)

5 Issues Impacting Utility - Internal First detailed analysis of the adequacy of water and sewer rates Historical Financial Policies and Practices Budgeted for Expenses to Exceed Revenues since FY 2008 Budgeted under-recovery in current year of approximately $384,000 Over $1.6 million transferred from Capital Projects Fund to Water and Sewer Fund Has resulted in available cash of approximately $900,000 Without transfers, City would have had to increase rates or utilize other available funds to cover expenses

6 Issues Impacting Utility - Internal Historical Financial Policies and Practices Historical budgets have not contained any costs for sewer department personnel, professional services, supplies, or capital expenditures. Current rates estimated to recover less than 55% of sewer related costs Some utility-related costs such as Utility Billing have historically been paid by the General Fund Both issues corrected in adopted FY 2011 Budget

7 Issues Impacting Utility - Internal Historical Financial Policies and Practices Historical practice for adjusting customer bills has been to adjust the dollar amount of the bill, not the level of billed water consumption or sewer flow Dollars billed and volumes do not correlate Under normal operating and weather conditions, the City’s current water and sewer rates are not projected to generate sufficient revenue to cover costs

8 Financial Performance Projected Revenue Performance

9 Financial Performance Projected Sewer Debt Service

10 Financial Performance Projected Rate Revenue Performance Utility Rate Revenue Requirement FY 2011FY 2012FY 2013FY 2014FY 2015 Water Projected Rate Revenue$ 674,254 Rate Revenue Requirement748,275813,828870,288930,411993,532 Over / (Under) Recovery$ (74,021)$ (139,574)$ (196,034)$ (256,157)$ (319,278) Sewer Projected Rate Revenue$ 355,241 Rate Revenue Requirement651,476714,101955,761967,079984,463 Over / (Under) Recovery$ (296,235)$ (358,861)$ (600,520)$ (611,838)$ (629,222) Total Utility Projected Rate Revenue$ 1,029,495 Rate Revenue Requirement 1,399,7511,527,9291,826,0491,897,4901,977,995 Over / (Under) Recovery $ (370,256)$ (498,435)$ (796,554)$ (867,995)$ (948,501)

11 Rate Study Results Estimated Rates Based on estimated revenue performance, immediate action is needed to adjust water and sewer rates to appropriate levels Recommending adjustments to Inside-City Rates Only Further adjustments to Outside-City Rates should be made at such time as they reach 115% of the then effective inside-City rate Given significant under-performance of current sewer rates, recommend using existing available cash in Water and Sewer Fund (approx. $900,000) to support implementation of sewer rate plan which attempts to mitigate rate shock Plan results in estimated cash balance of just over $122,000 in FY 2014 and accounts for needed funds to maintain operations and maintenance reserve of 45 days

12 Rate Study Results Estimated Rates - Water Projected Inside-City Water Rates under Current Rate Design CurrentFY 2011FY 2012FY 2013FY 2014FY 2015 Minimum Charge (Includes 1,000 gallons) $ 10.15$11.40$12.51$13.47$ 14.48$ Volumetric Rate (per 1,000 gallons) 1,001 – 10,000 gal.$ 3.56$ 4.00$ 4.39$ 4.73$ 5.08$ ,001 – 20,000 gal , Other Rate Design Considerations (recommended by TWCITF) Remove gallons allowed in minimum bill (Strongly Recommended) Price differential between rate blocks should be no less than 25% Differential between 10,001 – 20,000 gal. and 20,0001 gal. blocks is currently just over 22% Strongly recommend consideration of escalating meter charge More reflective of potential demand Impact to larger commercial customers and school district

13 Rate Study Results Estimated Rates - Water Projected Inside-City Water Rates with Escalating Meter Charge CurrentFY 2011FY 2012FY 2013FY 2014FY 2015 Meter Charge (Includes 1,000 gallons) 3/4 inch or less $ $ 10.47$ 10.78$ 11.53$ inch /2 inch inch inch inch inch Volumetric Rate (per 1,000 gallons) 1,001 – 10,000 gal$ 3.56$ 4.00$ 4.39$ 4.73$ 5.08$ ,001 – 20,000 gal ,

14 Rate Study Results Estimated Rates - Sewer Other Rate Design Considerations (Strongly Recommended) Remove 1,000 gallons allowed in minimum bill For commercial customers, bill all sewer volumes at same rate Sewer rates presented above are “phased-in” Utilizes available cash to support rate performance Projected Inside-City Sewer Rates under Current Rate Design CurrentFY 2011FY 2012FY 2013FY 2014FY 2015 Minimum Charge (Includes 1,000 gallons) $ 11.04$13.74$17.11$21.30$26.52$31.00 Volumetric Rate (Per 1,000 gallons) Residential 1,001 – 15,000 gal. $ 3.44$ 4.28$ 5.33$ 6.64$ 8.27$ 9.67 Commercial 1,001 – 50,000 gal. $ 3.44$ 4.28$ 5.33$ 6.64$ 8.27$ ,

15 Rate Study Results Fund Performance under Estimated Rates If rates are phased-in, City must continually evaluate rate performance and adjust rates as required over the planning period to maintain fund performance FY 2011FY 2012FY 2013FY 2014FY 2015 Projected Revenue Recovery under Estimated Rates Water$ 28$ 55$ 703$ 487$ 49 Sewer(210,951)(167,397)(276,864)(123,601)355 Total Over / (Under) Recovery(210,922)(167,342)(276,161)(123,114)404 Beginning Cash Balance$ 900,000$ 689,078$ 521,736$ 245,575$ 122,461 Ending Cash Balance689,078521,736245,575122,461122,865 Compare to 45-Days O&M$ 95,773$ 99,615$ 100,399$ 104,280$ 108,330 Available Cash in Excess of Reserves 593,305422,120145,17618,18114,535

16 Rate Study Results Monthly Customer Impact of Estimated Rates Monthly Impact of Estimated Rates under Existing Rate Design on Residential Customers CurrentFY 2011FY 2012FY 2013FY 2014FY ,000 gallons Water $ 24.39$ 27.40$ 30.07$ 32.39$ 34.80$ Sewer Total$ 49.19$ 58.26$ 68.50$ 80.25$ 94.40$ Year over Year Increase ,000 gallons Water $ $ 47.40$ 52.02$ 56.04$ 60.20$ Sewer Total$ 84.19$ 99.66$ $ $ $ Year over Year Increase

17 Rate Study Results Comparison of Monthly Water Charges

18 Rate Study Results Comparison of Monthly Sewer Charges

19 Rate Study Results Comparison of Total Monthly Charges

20 Wholesale Customers City provides contractual wholesale water service to three customers Review of contracts conducted – suggested changes to these agreements provided in separate memo Recommend implementation of a defined rate methodology that recognizes the costs, including the operational impact, and benefits associated with service to these customers Also Recommend City begin tracking more information regarding how these customers use the system (i.e., daily meter readings)

Questions and Comments? Chris Ekrut, Manager J. Stowe & Co E. Lookout Dr., Ste. 100 Richardson, TX