1. 1 Combined Utility System Cost of Service Rate Study Presentation April 6, 2010

2. 2 Combined Utility System (CUS)  The CUS is an enterprise fund  All funds used in the CUS are generated from water & sewer rates and fees  Does not receive any general fund money  Closed system – Under CUS master bond ordinance, cannot fund anything but water and sewer services  One exception – may fund a limited amount of drainage out of fund balance, per Ord. 2004-299  Cannot send funds to the general fund

3. 3 Recent History of CUS Rising prices for FY04 through FY10  TCEQ Unfunded Mandate -Annual Fees 228%  Chemicals 167%  Electricity 136%  Sludge Disposal 99%  Infrastructure Maintenance (O&M) 76%  Insurance 60%  Health Insurance/Pension 52%  Overall O&M 32%  Annual Debt Service – First/Junior Liens 53% ($233M in FY04, $356M in FY10)

4. 4 Recent History of CUS Residential Water Use per account Fiscal Year 2004 - 2010  Residential consumption in gallons per month has declined as more low flow appliances and fixtures are installed.  As townhouses/condominiums replace single family homes, also see lower consumption per account.  From FY04 to FY09 the range has been from a high of 6,736 in FY06 (drought year) to a low of 5,971 in FY07. The average from FY04 to FY09 is 6,276.  In the last 3 years average is 6,006 gallons/month. This trend continues into FY10 given the colder fall, winter and spring.  Even though lower usage recently, must have capacity for drought demand

5. 5 CUS Historical Charts Total Revenues O&M Expenditures Average Residential Customer Gallons/Month Billed * FY10 is current projectionprj = projection

6. 6 CUS Financial Position FY07 through FY11 * February 2010 PWE MFOR Submission

7. 7 Recent Steps Taken to Decrease CUS O&M  PWE has adopted less expensive ways to treat water and buy chemicals  Cost savings in chemicals alone for FY10 will exceed $4M  Implementing McKinsey & Company recommendations for an estimated $7 million in savings in FY11  Continuing to review/re-negotiate contracts for savings  Bio-solids contract change – savings of $7.0 million over next 5 years  Sludge removal contract – savings of $800k over 5 years  Began energy conservation study for major wastewater facilities  Significant capital costs that will be paid for out of energy savings  Long term benefits only

8. 8 FY10 Rate Study Objectives of Rate Study  Understand the System’s “cost of service” rates for each customer class for water and wastewater  Propose rates that ensure revenues fully cover the CUS’s costs and that meet all bond covenants – debt coverage and sound business practices  Propose rates that provide for the long term health and sustainability of the system  Consider new rate structure that moves rates in the direction of covering actual cost of service for each rate class over time  Restructure program by replacing “lifeline” rate (over time) with service charge waiver or discount for qualified single family customers  Structure single family rates to encourage conservation  Ensure that contract/non-City of Houston customers’ rates are set at the “cost of service” rate – not subsidized by Houston citizens

9. 9 Options for Rate Study The Rate Study created three financial scenarios CAPITAL IMPROVEMENT PROGRAM (in millions) FY11FY12FY13FY14FY15 Minimum Health, Safety & Regulatory (HSR) $172$183$210 Minimum HSR Plus Selective Investments * $216 $225 $234 Best Practices ** $370 CIP HistoryFY01FY02FY03FY04FY05FY06FY07FY08FY09FY10 $ Millions$291$415$293$304$360$329$246$350$256$167 History of CUS Water and Wastewater CIP *HSR plus other selected investments ** Provide for the long term health and sustainability of the system – best practices

10. 10 CUS Annual Debt Coverage Ratio History Annual Debt Coverage Ratio – Threshold 1.2 Net revenues to first lien debt service NO Prior to FY10, NO use of fund balance was required for this bond covenant. FY10 requires an estimated $40M use of fund balance to meet this covenant.

11. 11 Consequences of Doing Nothing  The CUS must at least implement the Minimum Health, Safety & Regulatory CIP to meet regulatory requirements.

12. 12 Consequences of Doing Nothing  The system will continue to lose money  Likely downgrades from Rating Agencies  Moody’s assigned a NEGATIVE outlook to the CUS on March 2 nd, 2010. If the CUS issues new debt without a significant rate adjustment, the System risks a ratings downgrade.  Downgrades will result in higher costs  Higher interest cost over the bonds life per $100M Par. Estimates: A1 to A2 $2.3M, A1 to A3 $3.45M & A1 to BAA1 $5.75M  Letters of Credit fees increase for every ratings downgrade, per notch: A1 to A2 $3.2M higher fees, at A2 to A3 add $0.7M plus A3 to BAA1 add $1.1M  If insured, higher insurance fees on new issues will cost more  Downgrades may impact future LOC availability

13. 13 Proposed 2011 Residential Monthly Water & Wastewater Bill This rate class three year average gallons per month is 6,000

14. 14 Proposed 2011 Multi-Family Monthly Water & Wastewater Bill

15. 15 Proposed 2011 Commercial Monthly Water & Wastewater Bill

16. 16 Water & Wastewater Rate Comparison Single Family 3,000 Gallons 5/8 & 3/4 Inch Meters

17. 17 Water & Wastewater Rate Comparison Single Family 6,000 Gallons 5/8 & 3/4 Inch Meters

18. 18 Water & Wastewater Rate Comparison Single Family 10,000 Gallons 5/8 & 3/4 Inch Meters

19. 19 Water & Wastewater Rate Comparison Multi-Family 10,000 Gallons

20. 20 Water & Wastewater Rate Comparison Commercial 10,000 Gallons

21. 21 Recommendations  Set rates at Best Practices CIP rates to ensure long term health and sustainability of the system  Set all non-city rates at cost of service  Implement Water & Wastewater rate adjustment June 1 st  Change annual automatic rate increase to be based on PPI, not to exceed annual CPI plus population index, in compliance with Proposition 1

22. 22 Comparison of Regional CPI vs. PPI Houston Regional CPI & PPI In Percentages Abbreviations: “PPI” - Producer Price Index all commodities Annual Percentage

23. 23 Addendum – Other Rates