HomeMy WebLinkAbout04-21-20 F&A Committee Packet1
OTAY WATER DISTRICT FINANCE AND ADMINISTRATION COMMITTEE MEETING and SPECIAL MEETING OF THE BOARD OF DIRECTORS
BY TELECONFERENCE
2554 SWEETWATER SPRINGS BOULEVARD SPRING VALLEY, CALIFORNIA
BOARDROOM
TUESDAY April 21, 2020 12:00 P.M.
This is a District Committee meeting. This meeting is being posted as a special meeting in order to comply with the Brown Act (Government Code Section §54954.2) in the event that
a quorum of the Board is present. Items will be deliberated, however, no formal board actions will be taken at this meeting. The committee makes recommendations to the full board for its consideration and formal action.
AGENDA
1.ROLL CALL
2.PUBLIC PARTICIPATION – OPPORTUNITY FOR MEMBERS OF THE PUBLIC TOSPEAK TO THE BOARD ON ANY SUBJECT MATTER WITHIN THE BOARD'S JU-RISDICTION BUT NOT AN ITEM ON TODAY'S AGENDA
In lieu of in-person attendance, members of the public may submit their comments onagendized and non-agendized items via email at boardsecretary@otaywater.gov.
Public comments submitted will be read into the record at the Board Meeting and the
public may continue to listen to meetings. The information on how to listen to the Dis-
trict’s live streaming can be found at this link: https://otaywater.gov/board-of-directors/agenda-and-minutes/committee-meetings/
DISCUSSION ITEMS
3.RECEIVE THE DISTRICT’S POLICY NO. 27, INVESTMENT POLICY, OF THEDISTRICT’S CODE OF ORDINANCES FOR REVIEW AND RE-DELEGATEAUTHORITY FOR ALL INVESTMENT RELATED ACTIVITIES TO THE CHIEFFINANCIAL OFFICER, IN ACCORDANCE WITH GOVERNMENT CODE SECTION
53607 (FAKHOURI) [5 minutes]
2
4.PRESENT THE RESULTS OF THE CURRENT SEWER COST OF SERVICE STUDYPREPARED BY HDR ENGINEERING, INC. AND REQUEST THAT THE BOARDDIRECT STAFF TO PREPARE THE FISCAL YEAR 2021 BUDGET USING THECOST OF SERVICE STUDY RESULTS (KOEPPEN) [10 mins]
5.ADJOURNMENT
BOARD MEMBERS ATTENDING: Mitch Thompson, Chair Mark Robak
All items appearing on this agenda, whether or not expressly listed for action, may be delib-
erated and may be subject to action by the Board.
The Agenda, and any attachments containing written information, are available at the Dis-trict’s website at www.otaywater.gov. Written changes to any items to be considered at the
open meeting, or to any attachments, will be posted on the District’s website. Copies of the
Agenda and all attachments are also available through the District Secretary by contacting her at (619) 670-2280.
If you have any disability which would require accommodation in order to enable you to par-ticipate in this meeting, please call the District Secretary at 670-2280 at least 24 hours prior to the meeting.
Certification of Posting
I certify that on April 17, 2020 I posted a copy of the foregoing agenda near the regular meeting place of the Board of Directors of Otay Water District, said time being at least 24 hours in advance of the meeting of the Board of Directors (Government Code Section
§54954.2).
Executed at Spring Valley, California on April 17, 2020.
/s/ Susan Cruz, District Secretary
STAFF REPORT
TYPE MEETING: Regular Board MEETING DATE: May 6, 2020
SUBMITTED BY: Eid Fakhouri,
Finance Manager
PROJECT: DIV. NO.All
APPROVED BY: Kevin Koeppen, Assistant Chief of Finance
Joseph R. Beachem, Chief Financial Officer
Jose Martinez, General Manager
SUBJECT: Annual Review of the Investment Policy (Policy No. 27) of the
District’s Code of Ordinances and the Re-Delegation of
Authority for All Investment Related Activities to the Chief
Financial Officer
GENERAL MANAGER’S RECOMMENDATION:
That the Board receives the District’s Investment Policy (Policy No.
27) of the District’s Code of Ordinances for review and re-delegate
authority for all investment related activities to the Chief
Financial Officer, in accordance with Government Code Section 53607.
COMMITTEE ACTION:
See Attachment A.
PURPOSE:
Government Code Section 53646 recommends that the District’s
Investment Policy be tendered to the Board on an annual basis for
review. In addition, Government Code Section 53607 requires that for
the Board’s delegation of investment responsibilities to the Chief
Financial Officer to remain effective, the governing board must re-
delegate authority over investment activities on an annual basis.
ANALYSIS:
The primary goals of the Investment Policy are to assure compliance
with the California Government Code, Sections 53600 et seq. The
primary objectives, in priority order, of investment activities are:
AGENDA ITEM 3
1.Protect the principal of the funds.
2.Remain sufficiently liquid to enable the District to meet
all operating requirements which might be reasonably
anticipated.
3.The District’s return is a market rate of return that is
commensurate with the conservative investments approach to
meet the first two objectives of safety and liquidity.
The code provides a broad range of investment options for local
agencies, including Federal Treasuries, Federal Agencies, Callable
Federal Agencies, the State Pool, the County Pool, high-grade
corporate debt, and others.
Each year, staff reviews the legislative changes to the California
Government Code to ensure our Investment Policy reflects the most
recent updates approved by the California State Legislature. During
this year’s policy review, there were no legislative changes that
affect our Investment Policy.
On an annual basis, staff submits the Investment Policy to our list
of Broker/Dealers for their professional input and guidance of the
District’s Investment Policy. This year, Otay’s Broker/Dealers did
not recommend any changes be made to our Investment Policy.
Because of the District’s adherence to a conservative range of
authorized investments, we have been able to maintain a healthy
portfolio that meets our overall investment objectives and supports
our long-term financial plans. The policy is consistent with the
current law and the overall objectives of the policy are being met.
FISCAL IMPACT: Joe Beachem, Chief Financial Officer
None.
STRATEGIC GOAL:
Demonstrate financial health through formalized policies, prudent
investing, and efficient operations.
LEGAL IMPACT:
None.
Attachments:
A)Committee Action
B)Exhibit 1 - Policy No. 27
ATTACHMENT A
SUBJECT/PROJECT: Annual Review of the Investment Policy (Policy No. 27) of
the District’s Code of Ordinances and the Re-Delegation of
Authority for All Investment Related Activities to the
Chief Financial Officer
COMMITTEE ACTION:
The Finance and Administration Committee recommend that the
Board review the Investment Policy (Policy No. 27) of the
District’s Code of Ordinances and re-delegate authority for all
investment related activities to the Chief Financial Officer.
NOTE:
The “Committee Action” is written in anticipation of the
Committee moving the item forward for board approval. This
report will be sent to the Board as a committee approved item,
or modified to reflect any discussion or changes as directed
from the committee prior to presentation to the full board.
OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY
Subject Policy Number Date Adopted Date Revised
INVESTMENT POLICY 27 9/15/93 5/1/19
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1.0: POLICY
It is the policy of the Otay Water District to invest public funds in
a manner which will provide maximum security with the best interest
return, while meeting the daily cash flow demands of the entity and
conforming to all state statues governing the investment of public
funds.
2.0: SCOPE
This investment policy applies to all financial assets of the Otay
Water District. The District pools all cash for investment purposes.
These funds are accounted for in the District’s audited Comprehensive
Annual Financial Report (CAFR) and include:
2.1) General Fund
2.2) Capital Project Funds
2.2.1) Designated Expansion Fund
2.2.2) Restricted Expansion Fund
2.2.3) Designated Betterment Fund
2.2.4) Restricted Betterment Fund
2.2.5) Designated Replacement Fund
2.2.6) Restricted New Water Supply Fund
2.3) Other Post Employment Fund (OPEB)
2.4) Debt Reserve Fund
Exceptions to the pooling of funds do exist for tax-exempt debt
proceeds, debt reserves and deferred compensation funds. Funds
received from the sale of general obligation bonds, certificates of
participation or other tax-exempt financing vehicles are segregated
from pooled investments and the investment of such funds are guided by
the legal documents that govern the terms of such debt issuances.
3.0: PRUDENCE
Investments should be made with judgment and care, under current
prevailing circumstances, which persons of prudence, discretion and
intelligence, exercise in the management of their own affairs, not for
speculation, but for investment, considering the probable safety of
their capital as well as the probable income to be derived.
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The standard of prudence to be used by investment officials shall be
the “Prudent Person” and/or "Prudent Investor" standard (California
Government Code 53600.3) and shall be applied in the context of
managing an overall portfolio. Investment officers acting in
accordance with written procedures and the investment policy and
exercising due diligence shall be relieved of personal responsibility
for an individual security's credit risk or market price changes,
provided deviations from expectations are reported in a timely fashion
and appropriate action is taken to control adverse developments.
4.0: OBJECTIVE
As specified in the California Government Code 53600.5, when
investing, reinvesting, purchasing, acquiring, exchanging, selling and
managing public funds, the primary objectives, in priority order, of
the investment activities shall be:
4.1) Safety: Safety of principal is the foremost objective of
the investment program. Investments of the Otay Water
District shall be undertaken in a manner that seeks to
ensure the preservation of capital in the overall portfolio.
To attain this objective, the District will diversify its
investments by investing funds among a variety of securities
offering independent returns and financial institutions.
4.2) Liquidity: The Otay Water District’s investment portfolio
will remain sufficiently liquid to enable the District to
meet all operating requirements which might be reasonably
anticipated.
4.3) Return on Investment: The Otay Water District’s investment
portfolio shall be designed with the objective of attaining
a benchmark rate of return throughout budgetary and economic
cycles, commensurate with the District’s investment risk
constraints and the cash flow characteristics of the
portfolio.
5.0 DELEGATION OF AUTHORITY
Authority to manage the Otay Water District’s investment program is
derived from the California Government Code, Sections 53600 through
53692. Management responsibility for the investment program is hereby
OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY
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delegated to the Chief Financial Officer (CFO), who shall be
responsible for all transactions undertaken and shall establish a
system of controls to regulate the activities of subordinate officials
and their procedures in the absence of the CFO.
The CFO shall establish written investment policy procedures for the
operation of the investment program consistent with this policy. Such
procedures shall include explicit delegation of authority to persons
responsible for investment transactions. No person may engage in an
investment transaction except as provided under the terms of this
policy and the procedures established by the CFO.
6.0: ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process shall
refrain from personal business activity that could conflict with the
proper execution and management of the investment program, or that
could impair their ability to make impartial investment decisions.
Employees and investment officials shall disclose to the General
Manager any material financial interests in financial institutions
with which they conduct business. They shall further disclose any
personal financial/investment positions that could be related to the
performance of the investment portfolio. Employees and officers shall
refrain from undertaking personal investment transactions with the
same individual with whom business is conducted on behalf of the
District.
7.0: AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The Chief Financial Officer shall maintain a list of District selected
financial institutions and security broker/dealers authorized and
approved to provide investment services in the State of California.
Investment services include the buying or selling of permissible
investments such as treasuries, government agencies, etc. for delivery
to the custodian bank. These may include “primary” dealers or regional
dealers that qualify under Securities & Exchange Commission Rule 15C3-
1 (Uniform Net Capital Rule). No public deposit shall be made except
in a qualified public depository as established by state laws. All
financial institutions and broker/dealers who desire to become
qualified bidders for investment transactions must supply the District
with the following, as appropriate:
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•Audited Financial Statements.
•Proof of Financial Industry Regulatory Authority (FINRA)
certification.
•Proof of state registration.
•Completed broker/dealer questionnaire.
•Certification of having read the District’s Investment
Policy.
•Evidence of adequate insurance coverage.
An annual review of the financial condition and registrations of
qualified bidders will be conducted by the CFO. A current audited
financial statement is required to be on file for each financial
institution and broker/dealer through which the District invests.
8.0: AUTHORIZED AND SUITABLE INVESTMENTS
From the governing body perspective, special care must be taken to
ensure that the list of instruments includes only those allowed by law
and those that local investment managers are trained and competent to
handle. The District is governed by the California Government Code,
Sections 53600 through 53692, to invest in the following types of
securities, as further limited herein:
8.01) United States Treasury Bills, Bonds, Notes or those
instruments for which the full faith and credit of the United
States are pledged for payment of principal and interest. There
is no percentage limitation of the portfolio which can be
invested in this category, although a five-year maturity
limitation is applicable.
8.02) Local Agency Investment Fund (LAIF), which is a State
of California managed investment pool, may be used up to the
maximum permitted by State Law (currently $65 million). The
District may also invest bond proceeds in LAIF with the same but
independent maximum limitation.
8.03) Bonds, debentures, notes and other evidence of
indebtedness issued by any of the following government agency
issuers:
OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY
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• Federal Home Loan Bank (FHLB)
• Federal Home Loan Mortgage Corporation (FHLMC or "Freddie
Mac")
• Federal National Mortgage Association (FNMA or "Fannie Mae")
• Government National Mortgage Association (GNMA or “Ginnie
Mae”)
• Federal Farm Credit Bank (FFCB)
• Federal Agricultural Mortgage Corporation (FAMCA or “Farmer
Mac”)
There is no percentage limitation of the portfolio which can be
invested in this category, although a five-year maturity from the
settlement date limitation is applicable. Government agencies
whose implied guarantee has been reduced or eliminated shall
require an “A” rating or higher by a nationally recognized
statistical rating organization.
8.04) Interest-bearing demand deposit accounts must be made
only in Federal Deposit Insurance Corporation (FDIC) insured
accounts. For deposits in excess of the insured maximum of
$250,000, approved collateral shall be required in accordance
with California Government Code, Section 53652. Certificates of
Deposit (CD) will be made only to the FDIC-insured limit of
$250,000. Investments in CD’s are limited to 15 percent of the
District’s portfolio.
8.05) Commercial paper, which is short-term, unsecured
promissory notes of corporate and public entities. Purchases of
eligible commercial paper may not exceed 2 percent of the
outstanding paper of an issuing corporation, and maximum
investment maturity will be restricted to 270 days. Investment is
further limited as described in California Government Code,
Section 53601(h). Purchases of commercial paper may not exceed 10
percent of the District’s portfolio.
8.06) Medium-term notes defined as all corporate debt
securities with a maximum remaining maturity of five years from
the settlement date or less, and that meet the further
requirements of California Government Code, Section 53601(k).
Investments in medium-term notes are limited to 10 percent of the
OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY
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District’s portfolio and no more than 2 percent of the
outstanding medium-term notes of any single issuer.
8.07) Money market mutual funds that invest only in Treasury
securities and repurchase agreements collateralized with Treasury
securities, and that meet the further requirements of California
Government Code, Section 53601(l). Investments in money market
mutual funds are limited to 10 percent of the District's
portfolio.
8.08) The San Diego County Treasurer’s Pooled Money Fund,
which is a County managed investment pool, may be used by the
Otay Water District to invest excess funds. There is no
percentage limitation of the portfolio which can be invested in
this category.
8.09) Under the provisions of California Government Code
53601.6, the Otay Water District shall not invest any funds
covered by this Investment Policy in inverse floaters, range
notes, interest-only strips derived from mortgage pools, or any
investment that may result in a zero interest accrual if held to
maturity. Also, the borrowing of funds for investment purposes,
known as leveraging, is prohibited.
9.0: INVESTMENT POOLS/MUTUAL FUNDS
A thorough investigation of the pool/fund is required prior to
investing, and on a continual basis. There shall be a questionnaire
developed which will answer the following general questions:
• A description of eligible investment securities, and a
written statement of investment policy and objectives.
• A description of interest calculations and how it is
distributed, and how gains and losses are treated.
• A description of how the securities are safeguarded
(including the settlement processes), and how often the
securities are priced and the program audited.
• A description of who may invest in the program, how often,
and what size deposits and withdrawals are allowed.
• A schedule for receiving statements and portfolio listings.
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•Are reserves, retained earnings, etc., utilized by the
pool/fund?
•A fee schedule, and when and how is it assessed.
•Is the pool/fund eligible for bond proceeds and/or will it
accept such proceeds?
10.0 COLLATERALIZATION
Collateralization will be required on certificates of deposit
exceeding the $250,000 FDIC insured maximum. In order to anticipate
market changes and provide a level of security for all funds, the
collateralization level will be 102% of market value of principal and
accrued interest. Collateral will always be held by an independent
third party with whom the entity has a current custodial agreement. A
clearly marked evidence of ownership (safekeeping receipt) must be
supplied to the entity and retained. The right of collateral
substitution is granted.
11.0: SAFEKEEPING AND CUSTODY
All security transactions entered into by the Otay Water District
shall be conducted on a delivery-versus-payment (DVP) basis.
Securities will be held by a third party custodian designated by the
District and evidenced by safekeeping receipts.
12.0: DIVERSIFICATION
The Otay Water District will diversify its investments by security
type and institution, with limitations on the total amounts invested
in each security type as detailed in Paragraph 8.0, above, so as to
reduce overall portfolio risks while attaining benchmark average rate
of return. With the exception of U.S. Treasury securities, government
agencies, and authorized pools, no more than 50% of the District’s
total investment portfolio will be invested with a single financial
institution.
13.0: MAXIMUM MATURITIES
To the extent possible, the Otay Water District will attempt to match
its investments with anticipated cash flow requirements. Unless
matched to a specific cash flow, the District will not directly invest
in securities maturing more than five years from the settlement date
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of the purchase. However, for time deposits with banks or savings and
loan associations, investment maturities will not exceed two years.
Investments in commercial paper will be restricted to 270 days.
14.0: INTERNAL CONTROL
The Chief Financial Officer shall establish an annual process of
independent review by an external auditor. This review will provide
internal control by assuring compliance with policies and procedures.
15.0: PERFORMANCE STANDARDS
The investment portfolio shall be designed with the objective of
obtaining a rate of return throughout budgetary and economic cycles,
commensurate with the investment risk constraints and the cash flow
needs.
The Otay Water District’s investment strategy is passive. Given this
strategy, the basis used by the CFO to determine whether market yields
are being achieved shall be the State of California Local Agency
Investment Fund (LAIF) as a comparable benchmark.
16.0: REPORTING
The Chief Financial Officer shall provide the Board of Directors
monthly investment reports which provide a clear picture of the status
of the current investment portfolio. The management report should
include comments on the fixed income markets and economic conditions,
discussions regarding restrictions on percentage of investment by
categories, possible changes in the portfolio structure going forward
and thoughts on investment strategies. Schedules in the quarterly
report should include the following:
• A listing of individual securities held at the end of the
reporting period by authorized investment category.
• Average life and final maturity of all investments listed.
• Coupon, discount or earnings rate.
• Par value, amortized book value, and market value.
• Percentage of the portfolio represented by each investment
category.
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17.0: INVESTMENT POLICY ADOPTION
The Otay Water District’s investment policy shall be adopted by
resolution of the District’s Board of Directors. The policy shall be
reviewed annually by the Board and any modifications made thereto must
be approved by the Board.
18.0: GLOSSARY
See Appendix A.
OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY
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APPENDIX A: GLOSSARY
ACTIVE INVESTING: Active investors will purchase investments and
continuously monitor their activity, often looking at the price
movements of their stocks many times a day, in order to exploit
profitable conditions. Typically, active investors are seeking short
term profits.
AGENCIES: Federal agency securities and/or Government-sponsored
enterprises.
BANKERS’ ACCEPTANCE (BA): A draft or bill or exchange accepted by a
bank or trust company. The accepting institution guarantees payment
of the bill, as well as the issuer.
BENCHMARK: A comparative base for measuring the performance or risk
tolerance of the investment portfolio. A benchmark should represent a
close correlation to the level of risk and the average duration of the
portfolio’s investments.
BROKER/DEALER: Any individual or firm in the business of buying and
selling securities for itself and others. Broker/dealers must register
with the SEC. When acting as a broker, a broker/dealer executes
orders on behalf of his/her client. When acting as a dealer, a
broker/dealer executes trades for his/her firm's own account.
Securities bought for the firm's own account may be sold to clients or
other firms, or become a part of the firm's holdings.
CERTIFICATE OF DEPOSIT (CD): A short or medium term, interest bearing,
FDIC insured debt instrument offered by banks and savings and loans.
Money removed before maturity is subject to a penalty. CDs are a low
risk, low return investment, and are also known as “time deposits”,
because the account holder has agreed to keep the money in the account
for a specified amount of time, anywhere from a few months to several
years.
COLLATERAL: Securities, evidence of deposit or other property, which a
borrower pledges to secure repayment of a loan. Also refers to
securities pledged by a bank to secure deposits of public monies.
COMMERCIAL PAPER: An unsecured short-term promissory note, issued by
corporations, with maturities ranging from 2 to 270 days.
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COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual
report for the Otay Water District. It includes detailed financial
information prepared in conformity with generally accepted accounting
principles (GAAP). It also includes supporting schedules necessary to
demonstrate compliance with finance-related legal and contractual
provisions, extensive introductory material, and a detailed
statistical section.
COUPON: (a) The annual rate of interest that a bond’s issuer promises
to pay the bondholder on the bond’s face value. (b) A certificate
attached to a bond evidencing interest due on a set date.
DEALER: A dealer, as opposed to a broker, acts as a principal in all
transactions, buying and selling for his own account.
DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of
securities: delivery versus payment and delivery versus receipt.
Delivery versus payment is delivery of securities with an exchange of
money for the securities. Delivery versus receipt is delivery of
securities with an exchange of a signed receipt for the securities.
DERIVATIVES: (1) Financial instruments whose return profile is linked
to, or derived from, the movement of one or more underlying index or
security, and may include a leveraging factor, or (2) financial
contracts based upon notional amounts whose value is derived from an
underlying index or security (interest rates, foreign exchange rates,
equities or commodities).
DISCOUNT: The difference between the cost price of a security and its
maturity when quoted at lower than face value. A security selling
below original offering price shortly after sale also is considered to
be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments
that are issued at a discount and redeemed at maturity for full face
value, e.g., U.S. Treasury Bills.
DIVERSIFICATION: Dividing investment funds among a variety of
securities offering independent returns.
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FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to
supply credit to various classes of institutions and individuals,
e.g., S&L’s, small business firms, students, farmers, farm
cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that
insures deposits in member banks and thrifts.
FEDERAL FARM CREDIT BANK (FFCB): The Federal Farm Credit Bank system
supports agricultural loans and issues securities and bonds in
financial markets backed by these loans. It has consolidated the
financing programs of several related farm credit agencies and
corporations.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are
traded. This rate is currently pegged by the Federal Reserve through
open-market operations.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION (FAMC or Farmer Mac): A
stockholder owned, publicly-traded corporation that was established
under the Agricultural Credit Act of 1987, which added a new Title
VIII to the Farm Credit Act of 1971. Farmer Mac is a government
sponsored enterprise, whose mission is to provide a secondary market
for agricultural real estate mortgage loans, rural housing mortgage
loans, and rural utility cooperative loans. The corporation is
authorized to purchase and guarantee securities. Farmer Mac
guarantees that all security holders will receive timely payments of
principal and interest.
FEDERAL HOME LOAN BANK (FHLB): Government sponsored wholesale banks
(currently 12 regional banks), which lend funds and provide
correspondent banking services to member commercial banks, thrift
institutions, credit unions and insurance companies.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC or Freddie Mac): A
stockholder owned, publicly traded company chartered by the United
States federal government in 1970 to purchase mortgages and related
securities, and then issue securities and bonds in financial markets
backed by those mortgages in secondary markets. Freddie Mac, like its
competitor Fannie Mae, is regulated by the United States Department of
Housing and Urban Development (HUD).
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FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA or Fannie Mae): FNMA, like
GNMA was chartered under the Federal National Mortgage Association Act
in 1938. FNMA is a federal corporation working under the auspices of
the Department of Housing and Urban Development (HUD). It is the
largest single provider of residential mortgage funds in the United
States. Fannie Mae is a private stockholder-owned corporation. The
corporation’s purchases include a variety of adjustable mortgages and
second loans, in addition to fixed-rate mortgages. FNMA’s securities
are also highly liquid and are widely accepted. FNMA assumes and
guarantees that all security holders will receive timely payment of
principal and interest.
FEDERAL RESERVE SYSTEM: The central bank of the United States created
by Congress and consisting of a seven member Board of Governors in
Washington, D.C., 12 regional banks and about 5,700 commercial banks
that are members of the system.
FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC. (FINRA): An independent,
not-for-profit organization authorized by Congress to protect
America’s investors by making sure the securities industry operates
fairly and honestly. It is dedicated to investor protection and
market integrity through effective and efficient regulation of the
securities industry. FINRA is the successor to the National
Association of Securities Dealers, Inc. (NASD).
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): A
government owned agency which buys mortgages from lending
institutions, securitizes them, and then sells them to investors.
Because the payments to investors are guaranteed by the full faith and
credit of the U.S. Government, they return slightly less interest than
other mortgage-backed securities.
INTEREST-ONLY STRIPS: A mortgage backed instrument where the investor
receives only the interest, no principal, from a pool of mortgages.
Issues are highly interest rate sensitive, and cash flows vary between
interest periods. Also, the maturity date may occur earlier than that
stated if all loans within the pool are pre-paid. High prepayments on
underlying mortgages can return less to the holder than the dollar
amount invested.
INVERSE FLOATER: A bond or note that does not earn a fixed rate of
interest. Rather, the interest rate is tied to a specific interest
OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY
Subject Policy Number Date Adopted Date Revised
INVESTMENT POLICY 27 9/15/93 5/1/19
Page 14 of 17
rate index identified in the bond/note structure. The interest rate
earned by the bond/note will move in the opposite direction of the
index. An inverse floater increases the market rate risk and modified
duration of the investment.
LEVERAGE: Investing with borrowed money with the expectation that the
interest earned on the investment will exceed the interest paid on the
borrowed money.
LIQUIDITY: A liquid asset is one that can be converted easily and
rapidly into cash without a substantial loss of value. In the money
market, a security is said to be liquid if the spread between bid and
asked prices is narrow and reasonable size can be done at those
quotes.
LOCAL AGENCY INVESTMENT FUND (LAIF): The aggregate of all funds from
political subdivisions that are placed in the custody of the State
Treasurer for investment and reinvestment.
MARKET VALUE: The price at which a security is trading and could
presumably be purchased or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future
transactions between the parties to repurchase/reverse repurchase
agreements that establish each party’s rights in the transactions. A
master agreement will often specify, among other things, the right of
the buyer-lender to liquidate the underlying securities in the event
of default by the seller borrower.
MATURITY: The date upon which the principal or stated value of an
investment becomes due and payable.
MONEY MARKET: The market in which short-term debt instruments (bills,
commercial paper, bankers’ acceptances, etc.) are issued and traded.
MUTUAL FUNDS: An open-ended fund operated by an investment company
which raises money from shareholders and invests in a group of assets,
in accordance with a stated set of objectives. Mutual funds raise
money by selling shares of the fund to the public. Mutual funds then
take the money they receive from the sale of their shares (along with
any money made from previous investments) and use it to purchase
OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY
Subject Policy Number Date Adopted Date Revised
INVESTMENT POLICY 27 9/15/93 5/1/19
Page 15 of 17
various investment vehicles, such as stocks, bonds, and money market
instruments.
MONEY MARKET MUTUAL FUNDS: An open-end mutual fund which invests only
in money markets. These funds invest in short term (one day to one
year) debt obligations such as Treasury bills, certificates of
deposit, and commercial paper.
PASSIVE INVESTING: An investment strategy involving limited ongoing
buying and selling actions. Passive investors will purchase
investments with the intention of long term appreciation and limited
maintenance, and typically don’t actively attempt to profit from short
term price fluctuations. Also known as a buy-and-hold strategy.
PRIMARY DEALER: A designation given by the Federal Reserve System to
commercial banks or broker/dealers who meet specific criteria,
including capital requirements and participation in Treasury auctions.
These dealers submit daily reports of market activity and positions
and monthly financial statements to the Federal Reserve Bank of New
York and are subject to its informal oversight. Primary dealers
include Securities and Exchange Commission registered securities
broker/dealers, banks, and a few unregulated firms.
PRUDENT PERSON RULE: An investment standard. In some states the law
requires that a fiduciary, such as a trustee, may invest money only in
a list of securities selected by the custody state—the so-called legal
list. In other states the trustee may invest in a security if it is
one which would be bought by a prudent person of discretion and
intelligence who is seeking a reasonable income and preservation of
capital.
PUBLIC SECURITIES ASSOCIATION (PSA): A trade organization of dealers,
brokers, and bankers who underwrite and trade securities offerings.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not
claim exemption from the payment of any sales or compensating use or
ad valorem taxes under the laws of this state, which has segregated
for the benefit of the commission eligible collateral having a value
of not less than its maximum liability and which has been approved by
the Public Deposit Protection Commission to hold public deposits.
OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY
Subject Policy Number Date Adopted Date Revised
INVESTMENT POLICY 27 9/15/93 5/1/19
Page 16 of 17
RANGE NOTE: An investment whose coupon payment varies and is dependent
on whether the current benchmark falls within a pre-determined range.
RATE OF RETURN: The yield obtainable on a security based on its
purchase price or its current market price. This may be the amortized
yield to maturity on a bond the current income return.
REGIONAL DEALER: A securities broker/dealer, registered with the
Securities & Exchange Commission (SEC), who meets all of the licensing
requirements for buying and selling securities.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these
securities to an investor with an agreement to repurchase them at a
fixed price on a fixed date. The security “buyer” in effect lends the
“seller” money for the period of the agreement, and the terms of the
agreement are structured to compensate him for this. Dealers use RP
extensively to finance their positions. Exception: When the Fed is
said to be doing RP, it is lending money that is increasing bank
reserves.
SAFEKEEPING: A service to customers rendered by banks for a fee
whereby securities and valuables of all types and descriptions are
held in the bank’s vaults for protection.
SECONDARY MARKET: A market made for the purchase and sale of
outstanding securities issues following their initial distribution.
SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to
protect investors in securities transactions by administering
securities legislation.
SEC RULE 15C3-1: See Uniform Net Capital Rule.
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises
(FHLB, FNMA, FAMCA, etc.), and Corporations, which have imbedded
options (e.g., call features, step-up coupons, floating rate coupons,
derivative-based returns) into their debt structure. Their market
performance is impacted by the fluctuation of interest rates, the
volatility of the imbedded options and shifts in the shape of the
yield curve.
OTAY WATER DISTRICT BOARD OF DIRECTORS POLICY
Subject Policy Number Date Adopted Date Revised
INVESTMENT POLICY 27 9/15/93 5/1/19
Page 17 of 17
TREASURY BILLS: A non-interest bearing discount security issued by the
U.S. Treasury to finance the national debt. Most bills are issued to
mature in three months, six months, or one year.
TREASURY BONDS: Long-term coupon-bearing U.S. Treasury securities
issued as direct obligations of the U.S. Government and having initial
maturities of more than 10 years.
TREASURY NOTES: Medium-term coupon-bearing U.S. Treasury securities
issued as direct obligations of the U.S. Government and having initial
maturities from two to 10 years.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission
requirement that member firms as well as nonmember broker-dealers in
securities maintain a maximum ratio of indebtedness to liquid capital
of 15 to 1; also called net capital rule and net capital ratio.
Indebtedness covers all money owed to a firm, including margin loans
and commitments to purchase securities, one reason new public issues
are spread among members of underwriting syndicates. Liquid capital
includes cash and assets easily converted into cash.
YIELD: The rate of annual income return on an investment, expressed as
a percentage. (a) INCOME YIELD is obtained by dividing the current
dollar income by the current market price for the security. (b) NET
YIELD or YIELD TO MATURITY is the current income yield minus any
premium above par or plus any discount from par in purchase price,
with the adjustment spread over the period from the date of purchase
to the date of maturity of the bond.
STAFF REPORT
TYPE MEETING:Regular Board Meeting MEETING DATE: May 6, 2020
SUBMITTED BY:Kevin Koeppen, Assistant
Chief of Finance
PROJECT: DIV. NO.All
APPROVED BY: Joseph R. Beachem, Chief Financial Officer
Jose Martinez, General Manager
SUBJECT:Communicate to the Board the Results of the Current Sewer Cost
of Service Study Prepared by HDR Engineering, Inc. and Obtain
Direction from the Board to Prepare the FY 2021 Budget Using
the Cost of Service Study Results
GENERAL MANAGER’S RECOMMENDATION:
Communicate to the Board the results of the current Sewer Cost of
Service Study prepared by HDR Engineering, Inc. and request that the
Board direct staff to prepare the FY 2021 budget using the cost of
service study results.
COMMITTEE ACTION:
Please see Attachment A.
PURPOSE:
Communicate to the Board the results of the current Sewer Cost of
Service Study prepared by HDR Engineering, Inc. (HDR) and request
that the Board direct staff to prepare the FY 2021 budget using the
cost of service study results.
BACKGROUND:
The District performs rate studies every three to five years
depending on changes in economic factors, price increases, usage
patterns, regulations, infrastructure, and other cost drivers. The
cost of service study is an important guide when setting rates. As
usage and cost drivers change over time, imbalances may occur in the
equity of how various customer classes pay for sewer. It has been
two years since the District’s last sewer rate study was performed.
Due to a combination of the District’s sewer operation debt
requirements and variability in winter usage, the District would
benefit from establishing a sewer rate structure that would increase
AGENDA ITEM 4
the stability of its sewer revenues and avoid rate spikes. This cost
of service study was prepared using the FY 2020 budget and six-year
rate model.
Similar to water rate setting, sewer rates must comply with the legal
constraints regarding utility ratemaking and California Constitution
Article XIII D, Section 6 (referred to as “Proposition 218”) is at
the forefront of the rate setting process. Proposition 218 requires
sewer and water utilities establish cost-based rates for the services
provided. At the time of the last comprehensive sewer rate study
conducted for the District in 2018, the technical analysis was
structured and developed to comply with the requirements of
Proposition 218, as were known at that time. The results of this
study recommend that the District modify the current sewer rate
structure and rebalance the charges to various customers and customer
classes. The overall impact of this rebalancing is neutral to rates
with the impact to individual customers and customer classes
discussed further in the Rate Analysis section of this staff report.
Process Timeline
Proposition 218 requires certain public hearing and protest
procedures be followed. The last 218 Notice and public hearing for
sewer rates was held in 2018. A new 218 Notice and hearing is
required to make the proposed changes. The changes are proposed to
be effective on January 1, 2021.
Today we are bringing rate modifications to the Board’s attention.
The next step will be to incorporate the changes presented in this
report into the FY 2021 rate model and budget. In June of 2020,
staff will request the Board approve the FY 2021 budget and direct
staff to move forward with the Proposition 218 hearing process using
the updated rates and rate structure. Only after the Proposition 218
hearing can the Board approve the rates and rate structure changes
presented in this report.
Rate Methodology
From FY 2010 to FY 2019 the sewer operation had no outstanding debt,
no debt covenants, and reserves were used to fund CIP projects. In
FY 2020, the sewer operation’s reserves were reduced to levels that
required debt funding for CIP projects. The terms of the debt
issuance include a covenant requiring the sewer operation maintain a
minimum debt service coverage of 115%. In addition, staff projected
that sewer would need to issue an additional $3 million of debt over
next two to four years. After evaluating the rate structure, revenue
history, and projected debt funding; staff recommended a rate study
be conducted at this time in order to establish a revenue structure
that will stabilize revenues and debt service coverage levels. The
current rate structure uses a one-year winter average usage to
determine the volumetric component of the sewer bill. In recent
years the winter water usage has fluctuated significantly between
years, causing revenues to fluctuate significantly from year to year.
To offset these changes staff historically recommends large rate
changes from year to year to maintain the necessary revenue levels.
Overall, these changes in winter water usage and rates result in
monthly bills changing consistent with the percentage change in
overall revenues.
For this study staff evaluated various cost-based rate structures
that would stabilize revenues for the District and overall rates for
customers. Commercial average annual volumes remain relatively
constant from year to year, however residential winter averages have
fluctuated significantly over the past several years. Due to these
significant fluctuations, staff has the need to identify rate
structures that stabilize winter averages.
Staff analyzed neighboring agency sewer rate structures and discussed
the methodologies with HDR. Following is a brief breakdown of other
local agencies variable sewer rate methodologies. The thirteen Metro
JPA agencies not included in the listing below charge a flat rate for
sewer services. The fourteen metro agencies listed below have a
mixed consumption/fixed based sewer rate structure. From the table,
one can see that half use a monthly average usage methodology and
half use a lowest billing month methodology to determine the
volumetric component of the sewer charge.
To determine the stability, staff assessed the variability that each
agency’s methodology would have on the District’s volumetric billing
component. Included in the table are the agency methodologies,
Otay’s unit average under each methodology, the variability of each
option, and the percent variability. The average unit figure
represents the six-year average based on the listed rate structure.
The variability is the standard deviation of the average annual
volumes over a six-year period. The percent variability is the
standard deviation as a percent of the six-year average.
Agency Variable Fee Sewer Rate Structure Average Variability* % Variability
La Mesa Monthly average fr Dec-Mar for last 5 yrs, max of 14 10.54 0.36 3%
Imperial Beach Monthly average fr Jan-Dec x 75%, max of 13.17 9.80 0.54 5%
Encinitas Last 5 yrs 2 month consecutive average lowest and 2nd lowest billings Dec-May/4*85% 10.50 0.74 7%
Escondido Monthly average fr Dec-Mar, max of 13.37 x 80%7.50 0.58 8%
Oceanside Monthly average Jan-Mar total / 90 x 30.42 x 95%, max of 11 7.79 0.87 11%
Otay - 3- Year Average Monthly average fr Jan-Apr for the last 3 years x 85%, min of 1, max of 30 9.60 1.14 12%
El Cajon Monthly average fr Dec-Mar, max of 21 10.87 1.33 12%
Fallbrook Monthly average fr Dec-Feb for last 2 yrs x 75%9.56 1.19 12%
Poway Lowest 2 month consecutive billing from Nov-Apr/2, x 85%, max of 26.5 8.36 1.06 13%
Olivenhain Lowest usage fr Dec-Mar, max of 10 6.23 0.87 14%
Chula Vista Lowest 2 month consecutive billing from Nov-Apr/2, max of 20 x 90%7.79 1.10 14%
Padre Dam Lowest of 2 consecutive bill periods Jan-Dec / # of days x 30, max of 12 7.71 1.15 15%
Del Mar Lowest 2 month consecutive billing from Nov-Apr/2, min of 4 9.28 1.40 15%
San Diego Lowest 2 month consecutive billing from Dec-Mar/2, max of 12 7.80 1.23 16%
Otay - Current Monthly average fr Jan-Apr x 85%, min of 1, max of 30 9.48 1.60 17%
* Variability is equal to the standard deviation of the 6 year averages.
By evaluating the variability of the District’s six-year averages
staff was able to assess the impact each methodology would have on
the stability of sewer volumes. Based on the results of the
evaluation, Otay’s current sewer rate structure was identified as the
least stable of the agencies that were examined. By changing to the
proposed three-year winter average methodology, the stability
increases by almost 30% to the sixth most stable compared to the
other methodologies.
Recommended Fee Methodology
Based on the need for a more stable rate structure and the results of
the rate structure review, staff is recommending a three-year winter
average consumption methodology maintaining the months of January
through April as the measurement period, as well as, the 15%
allowance for outdoor usage. The January to April winter average is
used because this period covers the months with the greatest level of
rainfall, which theoretically equates to the least amount of outdoor
water usage. This value represents the District’s most accurate
estimate of indoor water usage flowing to the sewer system. Using
less than this four-month period could adversely impact customers if
rainfall was heavier in the first half or second half of the winter
period. To provide an allowance for outdoor water usage during the
winter months, staff applies an 85% factor to the winter average.
Staff evaluated two, three, four, and five-year winter averages. The
standard deviation of each duration is in the table below.
Staff is recommending a three-year winter average over the other
options due to:
•The two-year average does not provide a significantly greater
level of stability than the current structure.
•The four-year average was not significantly different than the
three-year average.
•While a five-year average provides the most stability it
results in customers having a relatively fixed fee and extends
any payback period for customers who are implementing permanent
measures to reduce indoor water use.
•The three-year average provides a significant improvement in
stability and ample time for the District to smooth in rate
adjustments necessary to meet debt covenant requirements. It
also provides customers who are implementing permanent indoor
water use reductions with a benefit sooner than under a four or
five-year structure.
2 Yr 3 Yr 4 Yr 5 Yr
Standard Deviation 1.42 1.14 1.02 0.76
The sewer rate structure includes a maximum usage limit of 30 HCF per
month. A maximum component is used because there is a point where
water usage above a certain threshold is assumed to be used in a
manner that it will not be returning to the sewer system. Staff is
recommending maintaining the same maximum usage.
Flat Rate Methodology Analysis
The use of a flat fee was discussed with the consultant HDR and due
to the variability in the nature of the District’s sewer residential
customer base it was deemed more appropriate to continue a usage-
based billing methodology and a flat fee was not recommended. A flat
fee would be used when a homogeneous group of users exist. The
benefits of a flat fee are that they are easy to administer and
assume all customers have placed the same burden on the system. The
disadvantage of a flat fee is that it places the same burden on each
user regardless of that user’s impact on the system. The District’s
sewer system is not considered a homogeneous group and the usage of a
variable rate is consistent with the District’s water fee structure;
therefore, a flat fee methodology was not recommended.
Rate Analysis
Sewer fees are comprised of both a fixed monthly system fee and a
usage fee. A key aspect of the cost of service study is the
allocation of operating and capital costs between the fixed system
and usage fees based on generally accepted cost of service
principles. Fixed monthly system fees are set by the customer’s
meter size. For this study, changes in the fixed monthly system fees
reflect a true-up in equivalent meter ratios. An equivalent meter
ratio is the relationship of the maximum flow of each meter size to a
typical residential base meter size. The District uses a three-
quarter inch meter as the residential base meter size. Over a period
of time the fixed monthly system fee will move out of alignment with
the meter equivalency. The rates presented in this rate study align
with the appropriate meter equivalencies.
Usage fees are set by the customer class (i.e. residential, multi-
residential, and commercial) and reflect the allocation of costs
related to sewer flow levels and strength. Due to varying levels of
strength, commercial customer usage fees are classified by the State
Water Resources Control Board subclasses (i.e. schools, churches,
low-strength, medium-strength, and high-strength). The changes in
these charges are a result of changes in each customer’s class
average winter flow, or annual flow (commercial), and the strength of
the flow.
The results of the revisions in the fixed and consumption charges, to
meet the intent of Proposition 218 through the cost of service
analysis, will impact customers differently depending on the
customers meter size and strength level.
Following is a more detailed analysis of the impact by customer class
based on billable water usage or meter size. The rates below collect
the same revenue level as the existing rates; however, amounts will
shift between customer classes based on changes in usage patterns.
For this study changes in winter water average consumption and
overall cost allocations, has resulted in a shifting between the
customer classes. Overall, the results of the cost of service study
show that low-strength customers’ (residential, multi-family, and
commercial low) rates are set appropriately. However, medium-
strength and high-strength charges should be adjusted to reflect the
equitable allocation and distribution of costs for these two customer
classes. The following tables demonstrate approximate changes in
monthly fees based on listed volume assumptions. Actual amounts may
change once final usage volumes are known in May.
Residential Customers
The table below summarizes the impact on individual residential bills
based on a three-year customer winter average.
Multi-Residential Customers
The table below summarizes the impact per dwelling unit for multi-
residential bills based on each multi-residential complex.
Winter Average
Range (HCF)# of
Customers
2019
Winter
Average
(HCF)
2020
Winter
Average
(HCF)
% Winter
Average
Inc/(Dec)
2019
Monthly
Charge
2020
Monthly
Charge
$
Inc/( Dec)
%
Inc/(Dec)
0 - 10 3,014 5.9 6.1 3.6% $31.01 $31.07 $0.07 0.2%
11 - 20 1,374 12.3 13.4 9.0% $47.12 $49.14 $2.02 4.3%
21 and up 220 22.9 25.5 11.5% $72.08 $78.02 $5.93 8.2%
Residential
2019 Monthly
Consumption
(HCF)
2020
Monthly
Consumptio
n (HCF)
% Winter
Average
Inc/(Dec)
2019
MonthlyCharge
2020
MonthlyCharge
$
Inc/( Dec)
%
Inc/(Dec)
Hilton Head 2.0 676 37 4.3 4.9 15.5% $17.79 $19.15 $1.35 7.6%
Calle Verde 3.5 282 9 5.5 5.6 1.0% $24.73 $24.50 ($0.23) -0.9%
Dehesas Rd 3.0 96 1 4.6 4.5 -3.6% $14.07 $13.46 ($0.61) -4.4%
Avocado Village 3.0 204 2 4.8 5.3 9.4% $14.42 $15.32 $0.90 6.2%
Hillsdale 2.0 102 1 4.4 4.6 4.6% $12.18 $12.50 $0.32 2.6%
Multi-
Residential
Complex
Average
Meter Size
# of Dwelling
Units # of Meters
Per Dwelling Unit Averages
Multi-Residential
Schools
The table below summarizes the impact on the individual school’s
monthly charges based on the customer’s meter size.
Churches
The table below summarizes the impact on individual church monthly
charges based on the customer’s meter size.
Commercial – Low-Strength
The table below summarizes the impact on individual commercial low-
strength monthly charges based on the actual customer’s meter size.
2019
Monthly
Consumption
(HCF)
2020
Monthly
Consumptio
n (HCF)
% Annual
Average
Inc/(Dec)
2019
Monthly
Charge
2020
Monthly
Charge
$
Inc/( Dec)
%
Inc/(Dec)
2.0 3 112.0 87.8 -21.6% $410.20 $344.63 ($65.57) -16.0%
3.0 1 568.6 515.8 -9.3% $1,663.00 $1,509.03 ($153.96) -9.3%
10.0 1 2,574.3 2,367.4 -0.1 $8,300.31 $7,670.05 ($630.26) -7.6%
Meter Size Number of
Customers
Monthly Per Customer Averages
Schools
2019
Monthly
Consumption
(HCF)
2020
Monthly
Consumptio
n (HCF)
% Annual
Average
Inc/(Dec)
2019
Monthly
Charge
2020
Monthly
Charge
$
Inc/( Dec)
%
Inc/(Dec)
0.75 1 43.2 43.2 0.0% $123.99 $122.18 ($1.81) -1.5%
1.00 1 133.2 92.9 -30.2% $372.90 $268.57 ($104.33) -28.0%
2.00 2 94.7 88.4 -0.1 $367.10 $346.09 ($21.00)-5.7%
Meter Size Number of
Customers
Churches
Monthly Per Customer Averages
2019
Monthly
Consumption
(HCF)
2020
Monthly
Consumptio
n (HCF)
% Annual
Average
Inc/(Dec)
2019
Monthly
Charge
2020
Monthly
Charge
$
Inc/( Dec)
%
Inc/(Dec)
0.75 19 11.7 10.3 -11.9% $45.60 $41.49 ($4.11) -9.0%
1.00 4 113.4 109.5 -3.4% $323.51 $309.31 ($14.20) -4.4%
1.50 13 43.1 58.6 36.1% $189.27 $224.70 $35.43 18.7%
2.00 11 77.3 66.6 -13.9% $323.71 $292.49 ($31.22) -9.6%
6.00 1 318.3 318.3 -0.1 $1,612.33 $1,588.27 ($24.06) -1.5%
Meter Size Number of
Customers
Monthly Per Customer Averages
Commercial - Low Strength
Commercial – Medium-Strength
The table below summarizes the impact on individual commercial
medium-strength monthly charges based on the actual customer’s
average water usage.
Commercial – High-Strength
The table below summarizes the impact on individual commercial high-
strength bills based on the actual customer’s average water usage.
Conclusion
The sewer rates presented in the attached report have been calculated
using acceptable rate setting standards and meet the requirements of
Proposition 218 as they are known today. If so directed, staff will
be incorporating these rates into the FY 2021 budget, which will be
presented to the Board in June.
As part of the FY 2021 budget process, staff will again recommend a
five-year Proposition 218 notice. In mid-2020, staff will prepare
the Proposition 218 notices and in October 2020 a Proposition 218
hearing will be held to adopt the rates. After the Proposition 218
hearing, and upon approval of the rates, the new rates and rate
structures are proposed to be effective in January 2021.
The District has historically executed a five-year Proposition 218
notice. The District, as well as many other agencies, use the five-
year process with very positive results. In the past, to make these
notices effective for five-years, the Board has approved a pass-
through component of future rate increases from sewer service
providers, and also approved a separate maximum rate increase for the
2019
Monthly
Consumption
(HCF)
2020
Monthly
Consumptio
n (HCF)
% Annual
Average
Inc/(Dec)
2019
Monthly
Charge
2020
Monthly
Charge
$
Inc/( Dec)
%
Inc/(Dec)
0.75 3 4.3 4.1 -4.5% $29.59 $27.55 ($2.04)-6.9%
1.50 4 156.2 155.4 -0.5% $564.62 $515.19 ($49.42)-8.8%
2.00 5 69.5 74.1 6.6% $345.78 $336.13 ($9.65)-2.8%
Number of
CustomersMeter Size
Monthly Per Customer Averages
Commercial -Medium Strength
2019
Monthly
Consumption
(HCF)
2020
Monthly
Consumptio
n (HCF)
% Annual
Average
Inc/(Dec)
2019
Monthly
Charge
2020
Monthly
Charge
$
Inc/( Dec)
%
Inc/(Dec)
0.75 1 3.8 3.8 0.0% $32.34 $30.89 ($1.45)-4.5%
1.50 4 79.0 67.0 -15.2% $418.12 $344.22 ($73.90)-17.7%
2.00 2 101.9 104.8 2.9% $564.72 $541.41 ($23.32)-4.1%
Monthly Per Customer Averages
Meter Size Number of
Customers
Commercial - High Strength
portion of rates that are due to increases in internal costs. The
pass-through costs apply to rates, fees, and charges from sewer
service providers, are defined as costs charged by the County of San
Diego and City of San Diego. Staff will again be proposing a five-
year process including the same stipulations for increases in
internal and pass-through costs.
FISCAL IMPACT: Joe Beachem, Chief Financial Officer
The recommendations in this study may change the sewer charges for
individual customer types, but the overall change is financially
neutral as it is based on the FY 2020 budgeted cost. The proposed
changes bring added stability to the sewer rates and revenues.
STRATEGIC GOAL:
The District ensures its continued financial health through sound
policies and procedures.
LEGAL IMPACT:
None.
Attachments:
A)Committee Action Form
B)HDR Presentation
C)HDR Cost of Service Study Draft Report
ATTACHMENT A
SUBJECT/PROJECT:Communicate to the Board the Results of the Current Sewer
Cost of Service Study Prepared by HDR Engineering, Inc. and
Obtain Direction from the Board to Prepare the FY 2021
Budget Using the Cost of Service Study Results
COMMITTEE ACTION:
That the Finance and Administration Committee recommend that the
Board accept the Sewer Cost of Service Study prepared by HDR
Engineering, Inc. and direct staff to prepare the FY 2021 budget
using the Sewer Cost of Service Study results.
NOTE:
The “Committee Action” is written in anticipation of the
Committee moving the item forward for board approval. This
report will be sent to the Board as a Committee approved item,
or modified to reflect any discussion or changes as directed
from the Committee prior to presentation to the full board.
April 22, 2020
Summary of the Sewer
Cost of Service Study
Presented by:
Shawn Koorn
Associate Vice President
HDR Engineering, Inc.
2
Overview of the Presentation
•Purpose of the study
•Requirements of proposition 218
•Overview of the rate setting process
•Key assumptions of the study
•Review study results and recommendations
•Feedback / Discussion
•Next steps
3
Purpose of the Study
•Provide sufficient revenue to prudently operate
and maintain District’s sewer services
•Review the current sewer rate structures based on
industry standard approaches
•Develop equitable, cost-based, and legally
defendable rates
–Meet the intent of Proposition 218
–Review alternative rate designs
3
4
Proposition 218 Requirements
•Proposition 218 is a constitutional amendment designed
to protect taxpayers by limiting the methods by which
local governments can create or increase taxes, fees and
charges without taxpayer consent
•Proposition 218 is not prescriptive in defining a “cost-
based” rate
•In part, Proposition 218 requires
–Fees shall not exceed the reasonable cost of providing
the service
–Fees shall not exceed the proportional cost of providing
the service
5
Overview of the Rate Setting Process
Rate Design
Design cost-based rates for each class of service to meet the revenue needs of the
utility, along with any other rate design goals and objectives
Cost of Service
Equitably (proportionally) allocates the revenue requirement between the various
customer classes of service
Revenue Requirement
Compares the revenue of the utility to the expenses to evaluate the level of
overall rates
6
Key Assumptions of the Study
•Revenue Requirement
–Future revenue adjustments based on the level of
revenues necessary to meet operating and capital
needs
•Cost of Service
–Used generally accepted cost allocation techniques
–Considered the District’s specific facilities, customers,
and costs
–Calculated unit costs for the rate design
•Rate design
–Reviewed the structures and developed revenue neutral
rates
Summary Results of the
Sewer Rate Study
8
FY 2021 Revenue Requirement ($000s)
FY 2021
Revenues
Rate Revenues $2,743
Other Revenues 174
$2,916
Expenses
Total O&M $2,822
Total Taxes / Transfer 41
Rate Funded Capital 0
Net Debt Service 0
Total Reserve Funding 53
$2,916
Bal. / (Def.) of Funds $0
9
Revenue Requirement Summary
•Total FY 2021 revenues balance to expenses
–Revenues are based on a blend of the Jan 1, 2019 and
January 1, 2020 rates
•Major expense for the utility is Metro O&M Costs
(≈ 20% of total costs)
•Total revenue requirement includes the total costs
associated with providing sewer service
–Future rate adjustments will be determined in the
District’s budgeting process
10
Overview of Cost of Service
What is cost of service?
•Analysis to equitably allocate the revenue requirement to the
various customer classes of service
Why cost of service
•Generally accepted as “fair and equitable”
•Avoids subsidies
•Revenues track costs
•Meet the intent of Proposition 218
Objectives of Cost of Service
•Determine if subsidies exist
•Develop average unit costs (i.e., cost-based rates)
11
Generic Cost of Service Approach -Commercial
-Admin
-Treatment
-Collection
-Utilities
-Etc.
Total Expenses
Volume
Related
Strength
Related
Customer
Related
Low-Strength
Med-Strength
High-Strength
Low-Strength
Med-Strength
High-Strength
Low-Strength
Med-Strength
High-Strength
Low-Strength
Customers
Med-Strength
Customers
High-Strength
Customers
12
Cost of Service Summary
•Cost of service analysis provides the basis for the proposed
rates
–Based on customer characteristics and system requirements
•Results show the need for minor cost of service of service
adjustments
–Reflect cost of service results to meet the intent of Prop 218
•The cost of service provides two key pieces of information
–Allocated total costs to each class of service
–Average unit costs
•$ / Customer / Month (Equivalent Meter Cost)
•$ / CCF
13
Summary of the Cost of Service
Present
Rate
Revenues
($000s)
Allocated
Revenue
Requirement
($000s)
$
Difference
($000s)
%
Difference
Low-Strength [1]$2,658 $2,652 $6 -0.2%
Med-Strength 31 33 (2)5.4%
High-Strength 53 57 (4)7.5%
Total $2,742 $2,742 ($0)0.0%
[1] Low Strength includes residential, multi-family, and commercial low
14
Current Sewer Rates
•Residential: Flat monthly fixed charge and variable
consumption charge billed up to 85% of prior year winter water
use
–Low strength
•Multi-Residential: Fixed monthly charge by meter size and
variable consumption charge billed up to 85% of prior year
winter water use
–Low strength
•Commercial: Fixed monthly charge by meter size and variable
consumption charge billed up to 85% of prior year annual
water consumption
–Low strength
–Medium strength
–High strength
15
Rate Design Analysis
•Reviewed alternative winter water calculations for
establishing proposed rate structure
–Current winter period (Jan –April of prior year)
–Three year average of winter water consumption
–Flat residential customer charge
•A three year winter water average calculation is
recommended
•Alternative rate structures were developed and reviewed
with staff
•Recommended rate structure: Reduce rate levels to
maintain current revenues (revenue neutral) and average
bill impacts as volumes are moved to a 3-year winter
water average; rates reflect cost of service results
16
Rate Design (cont.)
•Proposed rates were developed to reflect the cost of
service analysis
–Fixed charge relationship maintained (updated in 2018
cost of service study), adjust level to collect the
appropriate amount of revenue
–Consumption charge revised to reflect the allocated
costs and strength levels (medium and high strength
customers)
•Incorporate transition to 3-year average for winter water
(Res & Multi-Res)
17
Cost-Based Rates –Fixed Charges
Current
Rates
Proposed
Rates
Residential $16.38 $16.13
Multi-Residential / Commercial
¾”$16.38 $16.13
1”40.94 40.32
1.5”81.88 80.63
2”131.00 129.00
3”245.64 241.89
4”409.40 403.15
6”818.79 806.29
8”1,310.08 1,290.08
10”1,883.23 1,854.49
18
Cost-Based Rates –Consumption Charges
Current
Rates
Proposed
Rates
Residential $2.93 $2.89
Multi-Residential 2.93 2.89
Commercial
Low Strength $2.93 $2.89
Medium Strength 3.64 3.29
High Strength 5.01 4.63
Schools 2.93 2.89
Churches 2.93 2.89
19
Typical Residential Bill
Billed Present Proposed
Use Rates Rates $%
0 $16.38 $16.13 ($0.25)-1.5%
2 22.24 21.91 (0.33)-1.5%
4 28.10 27.69 (0.41)-1.5%
6 33.96 33.47 (0.49)-1.4%
8 39.82 39.25 (0.57)-1.4%
10 45.68 45.03 (0.65)-1.4%
12 51.54 50.81 (0.73)-1.4%
14 57.40 56.59 (0.81)-1.4%
16 63.26 62.37 (0.89)-1.4%
18 69.12 68.15 (0.97)-1.4%
20 74.98 73.93 (1.05)-1.4%
Fixed Charge $ / Acct.Fixed Charge $ / Acct.
Monthly System Fee $16.38 Monthly System Fee $16.13
Consumption Charge $ / CCF Consumption Charge $ / CCF
Billed @ 85% of WW Avg $2.93 Billed @ 85% of WW Avg $2.89
Otay Water District
Sewer Cost of Service Study
Residential
Proposed Rates - Alt 1 - FY 2021
Difference
Present Rates Proposed Rates
20
Next Steps…
•Presentation to the Board (May)
•Determine overall rate adjustments during the budgeting
process (May)
•Proposition 218 Process (October)
–Set public hearing date and send customer notification
–Public presentation on proposed rates
–Board adopt the proposed rates, if no major protest
•Rate implementation (Jan 2021)
21
Thank you for your input!
22
Revenue Requirement ($000s)
22
Otay Water District
Sewer Cost of Service Study
April 2020
Draft Final Report
April 2, 2020
Mr. Kevin Koeppen
Assistant Chief of Finance
Otay Water District
2554 Sweetwater Springs Blvd.
Spring Valley, California 91978-2004
Subject: 2020 Sewer Cost of Service Study
Dear Mr. Koeppen:
HDR Engineering, Inc. (HDR) is pleased to present to the Otay Water District (District) the draft
final report for the comprehensive sewer cost of service study. The District’s comprehensive
study was developed to provide a financial plan and sewer rates that generate sufficient revenue
to fund the operating and capital needs of the sewer utility. More specifically, the study was
designed to develop cost-based and equitable sewer rates for the District’s customers. This
report outlines the overall approach used to achieve these objectives, along with our findings,
conclusions, and recommendations.
The District owns and operates the sewer system and conveys and treats wastewater generated
within the District’s service area. The costs associated with providing sewer service to the
District’s customers has been developed based on the District’s sewer system costs, customer
data, and system information and is discussed in more detail within this report. This study was
developed utilizing generally accepted sewer industry rate setting principles and methodologies.
This report provides the basis for developing and implementing sewer rates which are cost-
based, equitable, and legally defensible to the District’s customers.
We appreciate the assistance provided by the District’s project team in the development of this
study. More importantly, HDR appreciates the opportunity to provide these technical and
professional services to Otay Water District.
Sincerely yours,
HDR Engineering, Inc.
Shawn Koorn
Associate Vice President
Table of Contents i
Otay Water District – Sewer Cost of Service Study
Table of Contents
Executive Summary
Introduction .................................................................................................................. 1
Overview of the Rate Study Process .............................................................................. 1
Summary of the Sewer Revenue Requirement Analysis ................................................. 2
Summary of the Sewer Cost of Service Analysis ............................................................. 6
Summary of the Sewer Rate Designs ............................................................................. 7
Summary of the Sewer Rate Study ................................................................................. 9
1 Introduction and Overview
1.1 Introduction ...................................................................................................... 11
1.2 Goals and Objectives ......................................................................................... 11
1.3 Overview of the Rate Study Process .................................................................. 12
1.4 Organization of the Study .................................................................................. 13
1.5 Summary ........................................................................................................... 13
2 Overview of the Rate Setting Principles
2.1 Introduction ...................................................................................................... 14
2.2 Generally Accepted Rate Setting Principles ........................................................ 14
2.3 Determining the Revenue Requirement ............................................................ 14
2.4 Analyzing Cost of Service ................................................................................... 15
2.5 Designing Utility Rates ....................................................................................... 16
2.6 Economic Theory and Rate Setting .................................................................... 16
2.7 Summary ........................................................................................................... 17
3 Development of the Revenue Requirement Analysis
3.1 Introduction ...................................................................................................... 18
3.2 Development of the Sewer Revenue Requirement Analysis ............................... 18
3.2.1 Establishing a Time Frame and Approach ................................................ 18
3.2.2 Projection of Rate and Other Miscellaneous Revenues ............................ 19
3.2.3 Projection of Operation and Maintenance Expenses ............................... 19
3.2.4 Projection of Taxes and Transfer Payments ............................................. 20
3.2.5 Projection of Capital Improvement Funding Needs.................................. 20
3.2.6 Projection of Debt Service ....................................................................... 23
3.2.7 Reserve Funding ...................................................................................... 23
3.2.8 Summary of the Sewer Revenue Requirement ........................................ 24
3.3 Consultant’s Revenue Requirement Conclusion and Recommendations ............ 25
3.4 Summary of the Sewer Revenue Requirement Analysis ..................................... 25
Table of Contents ii
Otay Water District – Sewer Cost of Service Study
4 Development of the Cost of Service Analysis
4.1 Introduction ...................................................................................................... 26
4.2 Objectives of the Cost of Service ....................................................................... 26
4.3 Determining the Customer Classes of Service .................................................... 27
4.4 General Cost of Service Procedures ................................................................... 27
4.4.1 Functionalization of Costs ...................................................................... 27
4.4.2 Classification of Costs ............................................................................. 28
4.4.3 Development of the Allocation Factors .................................................. 29
4.5 Summary of the Sewer Cost of Service Analysis ................................................. 30
4.6 Summary of the Average Unit Costs .................................................................. 32
4.7 Consultant’s Cost of Service Conclusions and Recommendations ...................... 32
4.8 Summary ........................................................................................................... 32
5 Development of the Proposed Sewer Rate Designs
5.1 Introduction ..................................................................................................... 33
5.2 Rate Design Criteria and Considerations........................................................... 33
5.3 Development of Cost-Based Sewer Rates ......................................................... 33
5.4 Overview of the Present Sewer Rate Structure................................................. 34
5.5 Development of the Proposed Sewer Rates ..................................................... 35
5.6 Consultant’s Rate Design Conclusions and Recommendations ......................... 37
5.7 Summary.......................................................................................................... 37
Technical Appendix – Sewer Technical Analysis
Executive Summary 1
Otay Water District –Sewer Cost of Service Study
Executive Summary
Introduction
HDR was retained by Otay Water District (District) to conduct a comprehensive sewer rate study.
The main objectives of the study were:
x Review the District’s previously adopted sewer rates which were adopted through the
Proposition 218 process.
x Develop a financial plan for projecting operating and capital costs for the sewer utility for
planning purposes.
x Provide the framework and methodology, based on generally accepted industry best
practices, for the development of cost-based sewer rates.
The District owns and operates a sewer collection and treatment system. The District serves
approximately 4,700 connections and the sewer service area
differs from their water service area. More specifically, the
sewer service area covers approximately 8,800 acres or the
equivalent of about 11% of the District’s water service area.
Most wastewater is treated for use in the District’s recycled
water program but some of the wastewater collected is
conveyed to the San Diego Metropolitan Wastewater Joint
Powers Authority (Metro) for treatment.
The costs associated with providing sewer services to the District’s sewer customers has been
developed based on District provided information and it has been utilized in the development of
the proposed sewer rates.
Overview of the Rate Study Process
A comprehensive rate study uses three interrelated analyses to address the adequacy and equity
of the utility’s rates. These three analyses are a revenue requirement analysis, a cost of service
analysis, and a rate design analysis. These three analyses are illustrated below in Figure ES - 1.
“The District’s sewer service
area differs from their water
service area in that the sewer
service area covers
approximately 8,800 acres or
the equivalent of about 11% of
the District’s water service
area.”
Executive Summary 2
Otay Water District –Sewer Cost of Service Study
Figure ES – 1
Overview of the Comprehensive Sewer Rate Analyses
Shown above is the basic analytical framework that was utilized in the development of this study
for reviewing and evaluating the District’s sewer rates.
Summary of the Sewer Revenue Requirement Analysis
A revenue requirement analysis is the first analytical step in the comprehensive sewer rate study
process. This analysis determines the adequacy of the current sewer revenues (rates) to fund
annual operating expenses, capital improvement needs, and meet any financial policies of the
District. From this analysis, a determination can be made as to the overall level of sewer revenue
adjustments – if necessary – to provide adequate and prudent funding for the District’s sewer
system.
As a practical matter, a multi-year time frame is recommended in an attempt to identify and plan
for any major expenses that may be on the horizon. In this way, the District can anticipate future
financial requirements and then begin to plan for these changes sooner, thereby, minimizing
short-term sewer rate impacts while also stabilizing long-term sewer rates.
For the revenue requirement analysis a “cash basis” approach was utilized. The “cash basis”
approach is the most commonly used methodology by municipal and special district utilities to
set their revenue requirement and is comprised of operation and maintenance (O&M) expenses,
taxes/transfer payments, annual debt service payments, and rate funded capital projects. The
primary inputs for the District’s revenue requirement analysis were obtained from the District’s
budget documents, historical billed customer data, and the sewer capital improvement plan.
Budgeted O&M expenses were projected using inflationary factors for the District’s various
expenses to provide sewer collection and treatment services over the projected time period.
Revenue Requirement Analysis
Cost of Service Analysis
Rate Design Analysis
Compares the revenues to the expenses of
the utility to determine the overall rate
adjustment required
Allocates the revenue requirement to the
various customer classes of service in a
“fair and equitable" manner
Considers both the level and structure
of the rate design to collect the target
level of revenues
Executive Summary 3
Otay Water District –Sewer Cost of Service Study
The adequate funding of capital improvement projects is critical to maintain the existing sewer
facilities, provide consistent levels of service, and minimize rate impacts over time. A general
financial guideline states that, at a minimum, a utility should fund an amount equal to or greater
than annual depreciation expense through rates. Annual depreciation expense reflects the
current investment in plant being depreciated or “losing” its useful life. Therefore, this portion
of plant investment needs to be replaced or repaired to maintain the existing level of
infrastructure (and levels of service). However, it must be kept in mind that, in theory, annual
depreciation expense reflects an investment in infrastructure that was placed in service an
average of 15 years ago, assuming a 30-year useful (i.e., depreciable life). It is important to note
and understand that depreciation expense is not the same as replacement cost. Thus, funding an
amount which exceeds the sewer utilities’ share of depreciation expense is reasonable and
appropriate. In developing this financial plan, HDR and the District have attempted to minimize
rate impacts while prudently funding the planned capital improvement projects.
A capital funding plan was developed based on the District’s current capital improvement plan.
The goal of the funding plan was to utilize a balance of rates, reserves, and long-term debt in a
way that both funds the capital needs over the long-term and also minimizes rate impacts. Every
agency must balance the use of the various sources of capital funding depending on a large
number of variables. Each has a benefit and drawback and therefore, all the considerations must
be evaluated. This type of analysis is appropriate and necessary when developing the funding for
capital improvements and establishing cost-based rates.
The District has assumed the issuance of approximately $6.5 million of long-term debt in order
to pay for several substantial infrastructure projects during the projected six-year time period.
These projects will not only benefit the current customers of the District but also future
customers. Given this, the use of long-term debt is appropriate and is used as a tool to attempt
to equitably associate the future benefit (to future customers) to the associated future costs (in
the form of annual debt service payments).
Shown below in Table ES – 1 is a summary of the capital improvement plan for the projected five-
year review period.
Executive Summary 4
Otay Water District –Sewer Cost of Service Study
Table ES – 1
Summary of the Sewer Capital Improvement Plan ($000s)
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Capital Improvement Projects
Total Expansion Projects $3 $21 $37 $126 $171 $3
Total Betterment Projects 1,120 158 157 471 491 525
Total Replacement Projects 1,066 298 523 422 610 865
Total Capital Projects $2,188 $477 $717 $1,020 $1,272 $1,392
Less: Other Funding Sources
Sewer Operating Reserves $0 $0 $0 $0 $0 $0
Sewer Replacement Reserves 1,066 298 523 422 610 865
Sewer Betterment Reserves 1,120 158 157 471 491 525
Sewer Expansion Reserves 3 21 37 126 171 3
New Long Term Debt 0 0 0 0 0 0
Total Other Funding $2,188 $477 $717 $1,020 $1,272 $1,392
As shown in Table ES-1, the District’s expansion, betterment, and replacement projects are all
funded through available reserve fund balances. A portion of these reserves are funded through
annual rate revenues as well as a long-term borrowing during this time period. A more detailed
discussion of the sewer capital improvement funding plan is provided in Section 3 of this study.
Given a projection of O&M starting with the District’s budget and capital improvement funding
plan, the sewer revenue requirement analysis was developed. Table ES - 2 provides a summary
of the revenue requirement for the District’s sewer utility.
Executive Summary 5
Otay Water District –Sewer Cost of Service Study
Table ES – 2
Summary of the Sewer Revenue Requirement Analysis ($000)
FY 2020[1] FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Revenues
Rate Revenues[1] $2,872 $2,743 $2,743 $2,743 $2,743 $2,743
Misc Revenues 108 174 255 357 529 116
Total Revenues $2,979 $2,916 $2,998 $3,100 $3,272 $2,859
Expenses
Total O & M $2,795 $2,822 $2,916 $3,017 $3,123 $3,270
Taxes / Transfer 39 41 43 46 48 52
Debt Service 0 0 0 0 0 0
To / (From) Reserves 145 53 162 390 673 345
Total Expenses $2,979 $2,916 $3,122 $3,453 $3,845 $3,667
Bal. / (Def.) of Funds $0 $0 ($123) ($353) ($573) ($808)
Bal. as a % of Rate Rev. 0.0% 0.0% 4.5% 12.9% 20.9% 29.5%
Proposed Rate Adjustment [2] 0.0% 0.0% 9.0% 7.1% 7.1% 7.1%
Add'l Revenue from Adj. $0 $0 $123 $353 $573 $808
Total Bal. /(Def.) of Funds $0 $0 $0 ($0) $0 $0
[1] – Includes adopted rate revenue adjustment for FY 2020
[2] – Rate adjustments are assumed to be implemented Jan. 1st each fiscal year and effective for 6 months
As shown in Table ES – 2 above, the revenue requirement has summed the O&M, taxes /
transfers, rate funded capital, net debt service, and reserve funding. The total revenue
requirement is then compared to the total current revenues which include the sewer rate
revenues - at present rate levels - and other miscellaneous sewer revenues. From this comparison
a balance or deficiency of funds in each year can be determined. This balance or deficiency of
funds is then compared to the annual rate revenues to determine the level of rate revenue
adjustment needed to meet the overall revenue requirement.
It should be noted that the rate adjustment percentage is impacted not only by increases in
District operating and capital costs, but also from a changes in billable units for the volumetric
component of rates for the residential customer class which is a majority of the District’s rate
revenues. For example, in FY 2021 overall revenues are projected to decrease by approximately
4.5% due to the reduction in the recent winter water consumption for residential customers.
Additionally, the total revenue requirement is projected to increase by approximately 4.0%.
Taking the change of both revenues and expenditures into consideration, the overall percentage
change to the District’s revenues can be developed.
During this projected time period, the District’s rates appear to be deficient for FY 2021 through
FY 2025. The total overall deficiency is approximately $808,000. To address that deficiency,
annual sewer revenue adjustments are proposed for FY 2022 through FY 2025 as outlined in the
Executive Summary 6
Otay Water District –Sewer Cost of Service Study
table above. It is important to note that the District has historically implemented rate
adjustments on January 1st of the fiscal year and the analysis assumes this strategy is maintained.
Therefore, the proposed rate adjustments will only be effective for 6 months of each fiscal year
and is reflected in the projected percentage change for each fiscal year.
A more detailed discussion of the development of the revenue requirement analysis can be found
in Section 3.2. Detailed technical exhibits of the sewer revenue requirement analysis have been
included within the Technical Appendices.
Summary of the Sewer Cost of Service Analysis
A cost of service analysis determines the equitable allocation of the revenue requirement to the
various customer classes of service (i.e., residential, multi-residential, commercial). The objective
of the sewer cost of service analysis is different from determining the sewer revenue requirement
analysis. A revenue requirement analysis determines the utility’s overall financial needs, whereas
the cost of service analysis determines the fair and equitable (i.e., proportional) manner to collect
the overall total revenue requirement.
The District’s sewer cost of service analysis began by functionalizing the revenue requirement for
the sewer system. Functionalizing the data sorts it into major functions (e.g., power, materials,
treatment, administrative, etc.). Functionalization of the data was accomplished via the District’s
system of accounting. The functionalized sewer revenue requirement was then allocated into
their various cost components (volume, strength, customer-related). The individual allocation
totals were then equitably distributed to the various customer classes of service based on the
appropriate and proportional distribution factors. The distributed expenses for each customer
class were then aggregated to determine each customer class’s overall revenue responsibility.
These steps follow generally accepted industry methodologies and are outlined in the Water
Environment Federation Manual of Practice No. 27, Financing and Charges for Wastewater
System. Shown below in Table ES - 3 is a summary of the sewer cost of service analysis results by
customer class of service.
Table ES – 3
Summary of the Sewer Cost of Service Analysis ($000)
Customer Class of Service
Revenues at
Present
Rates
Allocated
Revenue
Requirement
Bal. / (Def.)
of Funds
Required %
Change in
Rates
Low Strength [1] $2,658 $2,652 $6 -0.2%
Medium Strength 31 33 (2) 5.4%
High Strength 53 57 (4) 7.5%
Total $2,743 $2,743 ($0) 0.0%
[1] – Low Strength includes Residential, Multi-Residential, and Low Commercial
The above results indicate that the customer classes of service are at or near their cost of service.
This means that the District’s overall revenues collected from each customer class of service is as
Executive Summary 7
Otay Water District –Sewer Cost of Service Study
close to their “cost of service” as reasonably possible, based on the proportional allocation of
costs and the customers utilization of the system. In making this statement, it is important to
note that a cost of service study is an analysis of a point in time and the District’s costs, customer
consumption patterns, and total usage change over time. With that in mind, a cost of service is a
static analysis of a dynamic and ever-changing situation.
While Table ES – 3 summarized the results of the sewer cost of service analysis by customer class
of service, the cost of service analysis also contains sufficient detail to understand costs by fixed
and variable charges. These unit costs, or cost-based rates, form the basis for the final proposed
sewer rates by customer class of service.
The Technical Appendices contains the various exhibits associated with the District’s cost of
service analysis.
Summary of the Sewer Rate Designs
The final step of the comprehensive sewer rate study process is the design of the sewer rates to
collect the appropriate levels of revenue for the system, and for each customer class of service.
The appropriate levels of revenue have been determined based on the results of the revenue
requirement and cost of service analysis. The revenue requirement analysis provided a set of
recommendations related to annual rate adjustments, while the cost of service results indicated
that minor interclass adjustments were needed at this time. The distributed costs in the cost of
service analysis incorporate the proposed revenue adjustment from the revenue requirement
analysis. Therefore, the proposed rates are designed to collect approximately the same amount
of revenue as the costs that the revenue requirement identifies. However, the cost of service
calculated unit costs have appropriately (equitably) realigned where the revenue is collected; for
example, between customer classes as well as from either the fixed or variable charges.
Provided below in Table ES – 4 are the present and proposed sewer rates for the District. This
study has not recommended any changes to the rate structure only the calculation of the winter
water average which is proposed to transition to a multi-year winter water average calculation
(3-year average). However, the relationships between fixed and variable charges have been
revised to be reflective of the District’s costs as determined within the cost of service analysis.
Executive Summary 8
Otay Water District –Sewer Cost of Service Study
Table ES – 4
Summary of the Present and Proposed Sewer Rates
Present
Rates FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Fixed Charge ($/Month)
Residential
Monthly System Fee $16.38 $16.13 $17.10 $18.22 $19.15 $20.60
Multi-Resident. / Comm.
3/4" $16.38 $16.13 $17.10 $18.22 $19.15 $20.60
1" 40.94 40.32 42.74 45.54 47.86 51.49
1-1/2" 81.88 80.63 85.48 91.08 95.73 102.97
2" 131.00 129.00 136.76 145.72 153.15 164.75
3" 245.64 241.89 256.44 273.23 287.18 308.92
4" 409.40 403.15 427.40 455.39 478.63 514.87
6" 818.79 806.29 854.78 910.77 957.25 1,029.74
8" 1,310.08 1,290.08 1,367.67 1,457.24 1,531.63 1,647.60
10" 1,883.23 1,854.49 1,966.01 2,094.78 2,201.70 2,368.41
Variable Charge ($/CCF)
Residential
Billed @ 85% of WW Avg $2.93 $2.89 $3.06 $3.26 $3.42 $3.59
Multi-Residential
Billed @ 85% of WW Avg $2.93 $2.89 $3.06 $3.26 $3.42 $3.59
Commercial
Low Strength $2.93 $2.89 $3.06 $3.26 $3.42 $3.59
Schools 2.93 2.89 3.06 3.26 3.42 3.59
Churches 2.93 2.89 3.06 3.26 3.42 3.59
Medium Strength 3.64 3.29 3.49 3.71 3.90 4.09
High Strength 5.01 4.63 4.91 5.23 5.48 5.76
As can be seen, the District has three separate rate schedules; residential, multi-residential, and
commercial. The rate structure is composed of a fixed monthly charge and a consumption
(volumetric) charge. The volumes of wastewater contributed by individual customer is not
metered. Given that, winter water consumption is used as a surrogate for residential and multi-
residential wastewater contributions. The District adjusts the winter water consumption for
residential and multi-residential customers to 85% to determine the sewer billing units. This
adjustment in consumption is used to be more reflective of wastewater contributions for these
customers. For commercial customers, annual water use is adjusted to 85% to determine the
sewer billing units.
The customer bill impacts from these proposed rates will vary by customer class of service and
by consumptive use. As an example, in FY 2021 and for a typical residential customer being billed
Executive Summary 9
Otay Water District –Sewer Cost of Service Study
8 CCF/month, the change in their monthly bill will decrease by approximately $0.57/month, or a
monthly sewer bill which goes from $39.82 to $39.25.
As part of the rate study update, District staff and HDR looked at the viability of various other
rate structures as alternatives to the District rates. One of the rate structures that was reviewed
was a flat charge for residential and multi-residential customers. Although there are benefits in
revenue stability and ease of administration there are also drawbacks to a flat rate structure. For
example, conservation incentives by having a volumetric component may be diminished.
Likewise, the equitability decreases as a customers’ bill does not specifically reflect their actual
demands the customer places on the wastewater system. Finally, this approach would take the
District in the opposite direction of the current industry trend of incorporating a volumetric
component to the sewer rate structure. These are just a few examples of the reasons why the
flat rate for residential and multi-residential customers is not recommended at this time. Another
component of the District’s rates that was reviewed was the current maximum of 30 CCF
maximum. After reviewing the most recent water consumption data it is the opinion of HDR that
the current maximum of 30 CCF is appropriate, and water consumption above that level is
generally not entering the sewer collection system.
Section 4 of this study provides a more detailed discussion of the present and proposed sewer
rates.
Proposition 218 Notices and Public Hearing
Given the requirements of what is commonly referred to as Proposition 218, a process must be
utilized in order to adopt and implement a change in an agencies rates. The first requirement is
that the rates must be cost-based or justified and that is the reason the District has developed
the cost of service update. Once the cost basis for the proposed rates has been calculated, a
public notice process must be undertaken in order to adopt the proposed rates. This begins with
the presentation of the proposed rates to the District’s Board of Directors. If the proposed rates
are acceptable and prudent, the Board will direct staff to prepare and mail the Proposition 218
notices to the District’s customers which outlines the changes in rates and the time, date, and
location of the public hearing.
The District Board will hold a public hearing at the specified time, date, and location to discuss
the publicly noticed and proposed rates. Absent sufficient protest by customers, the Board may
then move to adopt the proposed rates as outlined in the customer notification.
Summary of the Sewer Rate Study
This completes the overview of the development of the comprehensive sewer rate study for the
District. The focus of this study has been the prudent and adequate funding of the District’s sewer
utility, along with the development of equitable and cost-based sewer rates by customer class of
service. A full and complete discussion of the development of the District’s comprehensive sewer
rate study and the proposed sewer rates can be found in the following sections and exhibits of
this report.
Introduction and Overview 10
Otay Water District – Sewer Cost of Service Study
1 Introduction and Overview
1.1 Introduction
HDR was retained by the Otay Water District (District) to conduct a comprehensive sewer cost of
service study. The objective of the study was to review the District’s operating and capital costs
in order to develop a financial plan and cost-based rates for the District’s sewer customers. This
study determined the adequacy of the existing sewer rates and provides the framework and cost-
basis for any needed future sewer revenue adjustments.
The District owns and operates a sewer collection and treatment system. The District serves
approximately 4,700 connections. The District’s sewer service area differs from their water
service area in that the sewer service area covers approximately 8,800 acres or the equivalent of
about 11% of the District’s water service area. Most wastewater is treated for use in the District’s
recycled water program but some of the wastewater collected is conveyed to the San Diego
Metropolitan Wastewater Joint Powers Authority (Metro) for treatment.
The State of California has certain well established legal constraints regarding utility ratemaking,
of which California Constitution article XIII D, section 6 (commonly referred to as “Proposition
218”)1 is at the forefront. At its very core, Proposition 218 requires a water (and sewer) utility to
establish cost-based rates for the services provided.
This study has been designed and intended to comply with the legal requirements of Proposition
218, as they are currently understood. This study has been developed using industry accepted
sewer rate setting methodologies and best practices, along with District specific sewer system
data and information.
1.2 Goals and Objectives
The District had a number of key objectives in developing the sewer rate study. These key
objectives provided a framework for policy decisions in the analysis that follows. These key
objectives were as follows:
x Develop the sewer study in a manner that is consistent with the principles and methodologies
established by the Water Environment Federation (WEF), Manual of Practice No. 27,
Financing and Charges for Sewer Systems.
x In financial planning and establishing the District’s rates, review and utilize best industry
practices, while recognizing and acknowledging the specific and unique characteristics of the
District’s sewer system and facilities.
x Review the District’s rates utilizing “generally accepted” rate making methodologies to
determine adequacy and equity of the utility rates.
1 Proposition 218, enacted by California's voters in 1996, imposes certain procedures, requirements and voter
approval mechanisms for local government assessments, fees and charges.
Introduction and Overview 11
Otay Water District – Sewer Cost of Service Study
x Meet the District’s financial planning criteria and goals, such as debt service coverage ratios,
adequate funding of capital infrastructure, and maintenance of adequate and prudent
reserve levels.
x Develop a final proposed financial plan which adequately supports the sewer utility’s funding
requirements, while attempting to minimize overall impacts to rates.
x Provide rates designed to meet the legal requirements of Article XIII D and recent legal
decisions related to Article XIII D.
x Develop proposed rates that are cost-based and reflective of the District’s specific costs.
1.3 Overview of the Rate Study Process
User rates must be set at a level where a utility’s operating and capital expenses are met with
the revenues received from customers. This is an important point, as failure to achieve this
objective may lead to insufficient funds to maintain system integrity. To evaluate the adequacy
of the existing sewer rates, a comprehensive rate study is often performed. A comprehensive
rate study consists of three interrelated analyses. Figure 1 - 1 provides an overview of these
analyses.
Figure 1 – 1
Overview of the Comprehensive Sewer Rate Analyses
The study conducted by HDR included the three technical analyses discussed above. In
establishing cost-based rates, the revenue requirement analysis determines the overall revenue
needs of the utility. Next, the cost of service analysis provides an equitable allocation of the costs
to the different types of customers served, while also providing per unit costs which become the
cost-basis for the final rate designs. Finally, the rate design analysis utilizes the average unit costs
from the cost of service analysis to establish the revised cost-based rates. Each of these elements
of the technical analysis is discussed in more detail within this report.
Revenue Requirement Analysis
Cost of Service Analysis
Rate Design Analysis
Compares the revenues to the expenses of
the utility to determine the overall rate
adjustment required
Allocates the revenue requirement to the
various customer classes of service in a
“fair and equitable" manner
Considers both the level and structure
of the rate design to collect the target
level of revenues
Introduction and Overview 12
Otay Water District – Sewer Cost of Service Study
1.4 Organization of the Study
This report is organized in a sequential manner that first provides an overview of utility rate
setting principles, followed by sections that detail the specific steps used to review the District’s
sewer rates. The following sections comprise the District’s sewer cost of service study report:
x Section 2 – Overview of Rate Setting Principles
x Section 3 – Development of the Revenue Requirement Analysis
x Section 4 – Development of the Cost of Service Analysis
x Section 5 – Development of the Proposed Sewer Rate Designs
Technical Appendices are attached at the end of this report which details the various technical
analyses that were undertaken in the preparation of this study.
1.5 Summary
This report will review the various technical analyses undertaken by HDR and the District to
review their current sewer rates. The objective of this study is to develop cost-based sewer rates
which are compliant with the legal requirements of Proposition 218, as it is currently understood.
Overview of Rate Setting Principles 13
Otay Water District – Sewer Cost of Service Study
2 Overview of Rate Setting Principles
2.1 Introduction
This section of the report provides background information about the sewer rate setting process,
including descriptions of generally accepted principles, types of utilities, methods of determining
a revenue requirement, the cost of service analysis, and rate design. This information is useful
for gaining a better understanding of the details presented later in this report.
2.2 Generally Accepted Rate Setting Principles
As a practical matter, all utilities should consider setting their rates around some generally
accepted or global principles and guidelines. Utility rates should be:
x Cost-based, equitable, and set at a level that meets the utility’s full revenue requirement
x Easy to understand and administer
x Designed to conform to “generally accepted” rate setting techniques
x Stable in their ability to provide adequate revenues for meeting the utility’s financial,
operating, and regulatory requirements
x Established at a level that is stable from year-to-year from a customer’s perspective
2.3 Determining the Revenue Requirement
Most public utilities use the “cash basis” approach for establishing their revenue requirement
and setting rates. This approach conforms to most public utility budgetary requirements and the
calculation is easy to understand. A public utility totals its cash expenditures for a period of time
to determine required revenues. The revenue requirement for a public utility is usually comprised
of the following costs or expenses:
x Total Operating Expenses: This includes a utility’s operation and maintenance (O&M)
expenses, plus any applicable taxes or transfer payments. Operation and maintenance
expenses include the materials, electricity, labor, supplies, etc., needed to keep the utility
functioning.
x Total Capital Expenses: Capital expenses are calculated by adding debt service payments
(principal and interest) to capital improvements financed with rate revenues. In lieu of
including capital improvements financed with rate revenues, a utility sometimes includes
depreciation expense to stabilize the annual revenue requirement.
Under the “cash basis” approach, the sum of the total O&M expenses plus the total capital
expenses equals the utility’s revenue requirement during any selected period of time (historical
or projected).
Note that the two portions of the capital expense component (debt service and rate funded
capital) are necessary under the cash basis approach because utilities generally cannot finance
all their capital facilities with long-term debt. At the same time, it is often difficult to pay for
capital expenditures on a “pay-as-you-go” basis given that some major capital projects may have
Overview of Rate Setting Principles 14
Otay Water District – Sewer Cost of Service Study
significant rate impacts upon a utility, even when financed with long-term debt. Many utilities
have found that some combination of pay-as-you-go funding and long-term financing will often
lead to minimization of rate increases over time. Additionally, the use of long-term debt for the
funding of major capital improvements can have the added benefits of matching the service level
benefit to customers with the cost as well as matching the expense to the useful life of the asset.
For example, a significant capital asset will likely have an average lifespan exceeding 30 years,
depending on the specific asset. In the same way, the benefits from the service of that asset are
not all felt in the initial year only but rather over the lifetime of the asset. Therefore, it is a prudent
approach to capital funding major infrastructure improvements with long-term debt as this
matches the expense (through the debt service payments) to the benefit to customers and the
assets useful life.
Public utilities typically use the “cash basis”2 approach to establish their revenue requirements.
An exception occurs if a public utility provides service to a wholesale or contract customer. In
that situation, a public utility could use the “utility basis” approach (see Table 2 - 1) regarding
earning a fair return on its investment.
Table 2 – 1
Cash versus Utility Basis Comparison
Cash Basis Utility Basis (Accrual)
+ O&M Expenses + O&M Expenses
+ Taxes/Transfer Payments + Taxes/Transfer Payments
+ Rate Funded Capital
;ш Depreciation Expense) + Depreciation Expense
+ Debt Service (Principal + Interest) + Return on Investment
= Total Revenue Requirement = Total Revenue Requirement
For purposes of this discussion, the District has utilized the cash basis methodology for the
establishment of the revenue requirement analysis. Of these two generally accepted
methodologies, the use of the cash basis methodology for the District is the most appropriate.
2.4 Analyzing Cost of Service
After the total revenue requirement is determined, it is equitably allocated to the users of the
service. The allocation, usually analyzed through a cost of service analysis, reflects the cost
relationships for providing sewer services. A cost of service analysis requires three analytical
steps:
2 “Cash basis” as used in the context of rate setting is not the same as the terminology used for accounting
purposes and recognition of revenues and expenses. As used for rate setting, “cash basis” simply refers to the
specific cost components to be included within the revenue requirement analysis.
Overview of Rate Setting Principles 15
Otay Water District – Sewer Cost of Service Study
1. Costs are functionalized or grouped into the various cost categories related to providing
service (collection, treatment, etc.). This step is largely accomplished by the utility’s
accounting system.
2. The functionalized costs are then allocated to specific cost components. Allocation refers
to the arrangement of the functionalized data into cost components. For example, a utility’s
sewer costs are typically allocated as volume, strength, or customer-related.
3. Once the costs are allocated into components, they are proportionally distributed to the
customer classes of service (e.g., residential, multi-residential, commercial). The
distribution is based on each customer class’ proportional contribution to the cost
component (i.e., benefits received from, and burdens placed on the system and its
resources). For example, customer-related costs are distributed to each class of service
based on the total number of customers in that class of service. Once costs are distributed,
the revenues from each customer class of service required to achieve cost-based rates can
be determined.
At the conclusion of the cost of service analysis, two key pieces of information are provided. First,
the cost of service provides an understanding of the total revenues to be collected from each
class of service. The cost of service provides an equitable method to assign that total cost
between the various sewer customer classes of service (e.g., residential, multi-residential,
commercial). The other important piece of information provided by the cost of service analysis is
the calculation of average unit costs. Average unit costs are the distributed costs divided by the
appropriate billing units. This provides an understanding of the cost on a $/customer/month and
$/hundred cubic feet (CCF)3 basis. These calculated average unit costs are essentially the cost-
based sewer rates.
2.5 Designing Utility Rates
Rates that meet the utility’s objectives are designed based on the findings and conclusions from
both the revenue requirement and cost of service analysis. This approach results in rates that are
strictly cost-based and does not consider other non-cost based goals and objectives (economic
development, ability to pay, revenue stability, etc.). In designing rates, factors such as revenue
stability, continuity of past rate philosophy, ease of administration, and customer understanding
may typically be taken into consideration. However, in order to meet the legal requirements of
Proposition 218, the rates must take into consideration each customer class’s proportional share
of costs allocated through the cost of service analysis. Given this, the utility’s ability to take goals
and objectives other than cost-based is limited. However, in the design of the rate structure, the
utility’s goals and objectives can frame the approach for setting cost-based rates.
2.6 Economic Theory and Rate Setting
One of the major justifications for a comprehensive cost of service study is founded in economic
theory. Economic theory suggests that the price of a commodity must roughly equal its cost if
equity among customers is to be maintained. This statement’s implications on utility rate designs
are significant. For example, a sewer utility usually incurs strength-related costs to treat
3 A CCF = one-hundred cubic feet. One (1) CCF of water = 748 gallons of water
Overview of Rate Setting Principles 16
Otay Water District – Sewer Cost of Service Study
wastewater. It follows that the customers who have high strength wastewater and create the
need for greater treatment to address the strength of the wastewater should proportionally pay
a higher rate to address the strength of their wastewater. When costing and pricing techniques
are refined, consumers have a more accurate understanding of what the commodity costs to
produce and deliver. This price-equals-cost concept provides the basis for the subsequent
analysis and comments.
2.7 Summary
This section of the report has provided a brief introduction to the general principles, techniques,
and economic theory used to set sewer rates. These principles and techniques will become the
basis for the District’s comprehensive cost of service study.
Development of the Revenue Requirement 17
Otay Water District – Sewer Cost of Service Study
3 Development of the Revenue Requirement
3.1 Introduction
This section describes the development of the revenue requirement analysis for the District’s
sewer system. The revenue requirement analysis is the first analytical step in the comprehensive
rate study process. From this analysis a determination can be made as to the overall level of rate
adjustments needed to provide adequate and prudent funding for both operating and capital
needs of the sewer utility. The prior section of the report provided an overview of the general
approach and methodology to be used within this portion of the analysis.
3.2 Development of the Sewer Revenue Requirement Analysis
There are a number of steps associated with the development of the sewer revenue requirement
analysis. In developing the District’s sewer revenue requirement, the utility must financially
“stand on its own” and be properly funded. As a result, the revenue requirement analysis
assumes the full and adequate funding needed to operate and maintain the District’s sewer
system on a financially sound and prudent basis. No subsidies are assumed from the water
operations of the District.
Provided below is a more detailed discussion of the development of the sewer revenue
requirement analysis for District.
3.2.1 Establishing a Time Frame and Approach
The first step in calculating the revenue requirement for the District’s sewer system was to
establish a time frame for the revenue requirement analysis. The review period of FY 2020
through FY 2025 was determined to be an appropriate time period for the analysis and financial
plan. The financial plan was developed based on the District’s FY 2020 budget and capital plan.
Reviewing a multi-year time period is recommended since it attempts to identify any major
expenses that may be on the horizon. By anticipating future financial requirements, the District
can then begin planning for these changes sooner, thereby minimizing short-term rate impacts
and overall long-term rates.
The second step in determining the revenue requirement was to decide on the basis of
accumulating costs. In this particular case, for the revenue requirement analysis a “cash basis”
approach was utilized. As noted in Section 2, the “cash basis” approach or methodology is the
most commonly used methodology by municipal and special district utilities to set their revenue
requirement. This is also the methodology that the District has historically used to establish their
revenue requirement.
Given a time period around which to develop the revenue requirement and a method to
accumulate the costs; the focus shifts to the development and projection of the revenues and
expenses of the District’s sewer system.
The primary financial inputs in the development of the revenue requirement were the District’s
current budget documents, customer billing data, and capital improvement plan. Presented
Development of the Revenue Requirement 18
Otay Water District – Sewer Cost of Service Study
below is a detailed discussion of the steps and key assumptions contained in the development of
the projections of the District’s sewer revenue requirement analysis.
3.2.2 Projection of Rate and Other Miscellaneous Revenues
The first step in developing the District’s sewer revenue requirement was to develop a projection
of the sewer rate revenues, at present rate levels. In general, this process involved developing
projected billing units for each customer group (rate schedule). The billing units (accounts and
billed volumes) for each customer group were then multiplied by the corresponding sewer rates.
This method of independently calculating
revenues links the projected revenues used
within the analysis to the projected billing units.
Additionally, it aids in confirming that the billing
units used within the study are reasonable for
purposes of projecting future revenues, allocating
costs, and ultimately establishing the proposed
rates. For FY 2020, it is calculated that the District
will receive approximately $2.9 million in rate
revenues for the sewer utility, with the vast
majority of those revenues being received from the residential customer class of service. Rate
revenues, excluding projected rate increases, are projected to decrease slightly and then remain
flat and by FY 2025 reach approximately $2.7 million. It should be noted that the District’s sewer
system is relatively small and highly developed which means there is limited opportunities for
customer growth.
In addition to rate revenues, the District also receives non-operating (miscellaneous) revenues.
These miscellaneous revenues are related to property tax proceeds, late fees, non-operating
revenues, and others. In FY 2020, miscellaneous revenues are approximately $108,000. By FY
2025, it is projected that miscellaneous revenues will increase slightly to approximately
$116,000.
In total, including rate and miscellaneous revenue sources, the sewer utility is projected to collect
approximately $3.0 million in total revenues in FY 2020. Excluding future rate increases, the total
revenues are projected to remain relatively flat over time and be approximately $3.0 million by
FY 2025.
3.2.3 Projection of Operation and Maintenance Expenses
Operation and maintenance (O&M) expenses are incurred by the District to perform the daily
operations and maintain the sewer collection and treatment systems. The District has
wastewater treatment capacity for purposes of their recycled water program with the majority
of the District’s wastewater being treated locally by the District. The remaining wastewater
volumes are conveyed to the San Diego Metropolitan Wastewater Joint Powers Authority
(Metro) for treatment.
The starting point for the projection of the District’s sewer O&M expenses was the District’s FY
2020 budget. Budgeted O&M expenses were projected over the rate study time period based on
Development of the Revenue Requirement 19
Otay Water District – Sewer Cost of Service Study
both historical inflationary factors and known future inflationary factors. These factors took into
consideration the District’s historical cost increases and projected increases. Depending upon the
specific cost, the escalation factors for each year ranged from 2.0% to 6.0% for the various types
of expenses (e.g., labor, benefits, materials, etc.).
A major O&M expense for the District is wastewater treatment from Metro. For FY 2020, the
Metro expense is projected to be approximately $601,000. This Metro expense estimate, and the
expense estimates for Metro for all five years was provided by the District. Over time, the
expense is expected to increase to approximately $803,000 by FY 2025. This District also
contributes an average of approximately $258,000 per year towards Metro capital improvement
projects over the six-year review period.
In total, for FY 2020, the budgeted O&M expenses are $2.8 million and with the assumed
escalation of costs over time, it is projected that the FY 2025 O&M expenses will be just under
$3.3 million.
3.2.4 Projection of Taxes and Transfer Payments
The District’s sewer utility does not pay any taxes or payment in lieu of taxes (PILOT) to any
other governmental entity. There are, however, annual transfers to the OPEB fund which equals
$39,400 in FY 2020.
3.2.5 Projection of Capital Improvement Funding
A key component in the development of the sewer revenue requirement was properly and
adequately funding capital improvement project needs (i.e., infrastructure). One of the major
issues facing many utilities across the U.S. is the amount of deferred capital projects and the
funding pressure from regulatory-related improvements. The proper and adequate funding of
capital projects is an important issue for all sewer utilities and is not just a local issue or concern
of the District.
In general, there are three types of capital projects that the District may need to fund. These
include the following types:
x Renewal and replacement projects
x Growth / capacity expansion projects
x Regulatory-related projects
A renewal and replacement project is essentially maintaining the existing system that is in place
today. As the existing plant becomes worn out, obsolete, etc., the District should be making
continuous investments to maintain the integrity of its sewer facilities. In contrast to this, the
District may make capital investments to expand the capacity of facilities to accommodate future
customers. Finally, certain projects may be a function of a regulatory requirement in which the
Federal and / or State government mandates the need for an improvement to the system to meet
a regulatory standard.
Development of the Revenue Requirement 20
Otay Water District – Sewer Cost of Service Study
Understanding these different types of capital projects is important because it may help to
explain why costs are increasing and the cost drivers for any needed rate adjustment. In addition,
and more importantly, the way in which projects are funded may vary by the type of capital
project. For example, renewal and replacement projects may be paid for via rates and funded on
a “pay-as-you-go basis”. In contrast to this, growth or capacity expansion projects may be funded
through the collection of a capacity fee (i.e., growth-related charges) in which new development
pays a proportional and equitable share of the cost of improvements required as a result of their
connection (impact). Finally, regulatory projects may be funded by a variety of different means,
which may include rates, long-term debt, grants, etc.
While the above discussion appears to neatly divide capital projects into three clearly defined
categories, the reality of working with specific capital projects may be more complex. For
example, a pump may be replaced, but while being replaced, it is also up-sized to accommodate
greater capacity. There are various projects that share these “joint” characteristics. At the same
time, projects may not be “replacement” related, but rather “betterment/improvement” related.
The District utilizes the terms “replacement”, “expansion”, and “betterment” to describe their
capital projects.
While the total amount of a project may vary from year to year, the sewer capital funding plan
should be developed in an attempt to provide a consistent funding source for the utility. A
desirable funding target for rate funded capital is an amount equal to or greater than annual
depreciation expense. Depreciation expense reflects the amount of capital infrastructure that is
becoming worn out or obsolete. While funding an amount equal to depreciation is considered an
industry best practice, even with this level of funding, depending upon the timing of future
replacement capital projects, additional funding from rates may be needed at some point in time
to address the replacement or betterment of the District’s existing assets. It is important to note
and understand that depreciation expense is not the same as replacement cost. Thus, funding an
amount which exceeds depreciation expense is considered to be both prudent and appropriate.
In developing this financial plan, HDR and the District have attempted to minimize rate impacts
while funding the planned capital improvement projects of the District.
The District has taken the direction of issuing long-term debt in order to pay for some of the
substantial infrastructure projects planned over the time period. These projects will not only
benefit the current customers of the District but also future customers. Given this, the use of
long-term debt is appropriate and is used as a tool to attempt to equitably associate the future
benefit (to future customers) to the associated future costs (in the form of annual debt service
payments).
The balancing of rate revenues, available reserves, and debt funding provides the District with a
method to fund capital over the long-term and minimize rates to the greatest extent possible.
Shown below in Table 3 – 1 is summary of the District’s capital improvement plan that was used
in the development of the sewer revenue requirement.
Development of the Revenue Requirement 21
Otay Water District – Sewer Cost of Service Study
Table 3 – 1
Summary of the Sewer Capital Improvement Plan ($000s)
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Capital Improvement Projects
Total Expansion Projects $3 $21 $37 $126 $171 $3
Total Betterment Projects 1,120 158 157 471 491 525
Total Replacement Projects 1,066 298 523 422 610 865
Total Capital Projects $2,188 $477 $717 $1,020 $1,272 $1,392
Less: Other Funding Sources
Sewer Operating Reserves $0 $0 $0 $0 $0 $0
Sewer Replacement Reserves 1,066 298 523 422 610 865
Sewer Betterment Reserves 1,120 158 157 471 491 525
Sewer Expansion Reserves 3 21 37 126 171 3
New Long Term Debt 0 0 0 0 0 0
Total Other Funding $2,188 $477 $717 $1,020 $1,272 $1,392
As mentioned, the District is funding capital through a mix of rate revenues, available reserves,
and long-term debt. Given this, it is important to understand the level of funding from each
source. It is important to note that the District is projecting the need for long-term debt issuances
in FY 2020 and FY 2022 and that the proceeds from these issuances have been deposited in the
replacement fund reserves and are then utilized as a funding source for replacement capital
improvement projects. Provided below In Table 3 – 2 is a more detailed summary of the funding
plan for the review period of FY 2020 through FY 2025.
Development of the Revenue Requirement 22
Otay Water District – Sewer Cost of Service Study
Table 3 – 2
Summary of the Sewer Capital Improvement Plan ($000s)
FY 2020 –
FY 2025
Funding
% of
Total Notes
Capital Improvement Projects
Total Expansion Projects $360 5.1%
Total Betterment Projects 2,921 41.3%
Total Replacement Projects 3,785 53.6%
Total Capital Projects $7,066
Capital Improvement Funding
Replacement Reserves 3,785 53.6% Debt proceeds fund Replacement Reserve
Betterment Reserves 2,921 41.3%
Expansion Reserves 360 5.1%
Rate Funded 0 0.0%
Total CIP Funding $7,066
As can be seen above, the District is funding capital projects from a variety of different sources.
It is important to note that the District is utilizing reserve funds, however, not to the extent above
annual funding and existing balances so that reserve levels are reduced below target minimums.
The District should continue to monitor reserve levels in order to maintain the target or minimum
balances.
3.2.6 Projection of Debt Service
The District recently issued long-term debt to fund capital improvements in FY 2020. Additionally,
the District is planning to issue additional long-term debt in FY 2022. The District has assumed a
total of $6.5 million - a $3 million issuance completed in FY 2020 and $3.5 million is planned for
FY 2022 - in long-term debt to fund replacement capital projects. The annual debt service
associated with this debt issuance in total is estimated at approximately $379,000/year. There
are no additional long-term debt issuances assumed over the projected six-year review period.
The District has made a concerted effort to strategically plan debt issuances and continues to
also focus on cash (rate) financing capital improvement projects with the ultimate goal of keeping
a steady projection of rates as well as keeping the overall rate level low.
3.2.7 Reserve Funding
The final component of the revenue requirement analysis is the “To / (From) Reserves” line item
or additional transfers to reserve funds to maintain targeted fund balances or for future funding
of specific projects. The rate analysis assumes annual transfers both into and out of the operating,
replacement, expansion, and betterment reserves. These transfers are used to fund capital
improvements in future years. This provides funding for planned improvements in order to
provide funding prior to the need for adjusting rates or long-term borrowing to fund
improvements. The average transfer is approximately $678,000 per year over the review period.
Development of the Revenue Requirement 23
Otay Water District – Sewer Cost of Service Study
3.2.8 Summary of the Sewer Revenue Requirement
Given the above projections of revenues and expenses, a summary of the sewer revenue
requirement analysis can be developed. In developing the revenue requirement analysis,
consideration was given to the financial planning considerations of the District. In particular,
emphasis was placed on attempting to minimize rates, yet still have adequate funds to support
the operational activities and capital projects throughout the projected time period.
The revenue requirement has summed the O&M, taxes and transfers, rate funded capital, net
debt service and the reserve funding. The total revenue requirement is then compared to the
total sources of funds which include the rate revenues, at present rate levels, and other
miscellaneous revenue sources. From this comparison a balance or deficiency of funds in each
year can be evaluated. This balance or deficiency of funds is then compared to the sewer rate
revenues to determine the level of revenue adjustment - if needed - to meet the revenue
requirement (i.e., support cost-based sewer rates). Table 3 – 3 provides a summary of the
revenue requirement analysis for the District’s sewer utility.
Table 3 – 3
Summary of the Sewer Revenue Requirement Analysis ($000)
FY 2020[1] FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Revenues
Rate Revenues[1] $2,872 $2,743 $2,743 $2,743 $2,743 $2,743
Misc Revenues 108 174 255 357 529 116
Total Revenues $2,979 $2,916 $2,998 $3,100 $3,272 $2,859
Expenses
Total O & M $2,795 $2,822 $2,916 $3,017 $3,123 $3,270
Taxes / Transfer 39 41 43 46 48 52
Debt Service 0 0 0 0 0 0
To / (From) Reserves 145 53 162 390 673 345
Total Expenses $2,979 $2,916 $3,122 $3,453 $3,845 $3,667
Bal. / (Def.) of Funds $0 $0 ($123) ($353) ($573) ($808)
Bal. as a % of Rate Rev. 0.0% 0.0% 4.5% 12.9% 20.9% 29.5%
Proposed Rate Adjustment [2] 0.0% 0.0% 9.0% 7.1% 7.1% 7.1%
Add'l Revenue from Adj. $0 $0 $123 $353 $573 $808
Total Bal. /(Def.) of Funds $0 $0 $0 ($0) $0 $0
[1] - Includes adopted rate revenue adjustment for FY 2020
[2] - Rate adjustments are assumed to be implemented Jan. 1st each fiscal year and effective for 6 months
As can be seen in the above table, the revenue requirement analysis indicates that for FY 2020
the revenues balance to the projected expenses of the utility. However, over time, there are
deficiencies within the revenue requirement analysis. Over the five-year projected period, and
by FY 2025, the District’s sewer rates are projected to be deficient by approximately $808,000 or
Development of the Revenue Requirement 24
Otay Water District – Sewer Cost of Service Study
29.5% of the present rates. This implies that over the five-year period rate revenues should be
adjusted to meet this deficiency.
3.3 Consultant’s Conclusions and Recommendations
The revenue requirement analysis results show that the District’s current sewer rates are not at
a level to adequately fund the operating and capital needs over the review period. HDR concludes
that the District’s sewer revenues should be adjusted to adequately meet the District’s revenue
requirements. If the revenues are not adjusted, the sewer utility could be adversely effected by
a number of issues such as reduced O&M, reduced service levels to customers, deferred capital
maintenance, and declining reserves funds which may fall below desired minimum levels.
To mitigate the funding deficiencies shown in Table 3 - 3, a rate transition plan was developed
which proposes rate adjustments over the five year period. It is proposed that the District does
not adjust revenue levels in FY 2021 (0.0%) then adjust revenues by 9.0% in FY 2022, and 7.1%
from FY 2023 through FY 2025. The District has historically implemented the rate adjustments
January 1st of each fiscal year meaning the impact is only effective for six months or half of the
fiscal year. It is assumed that this strategy is maintained for the review period. As can be seen at
the bottom of Table 3 - 3, with these proposed adjustments, the additional revenue generated
by the adjustments balances to the deficiencies shown. In that way, the revenue adjustments for
each year balance to the revenue requirements developed for each year.
The revenue requirement analysis for the District was developed to meet the financial planning
and policy objectives of the District. More specifically, the revenue requirements are designed to
adequately and prudently fund the District’s sewer operating and capital needs.
3.4 Summary of the Sewer Revenue Requirement
This section of the report has provided a discussion of the District’s sewer revenue requirement
analysis. As a part of the revenue requirement analysis, a proposed rate transition plan was
developed to support the District’s operating and capital needs. The proposed sewer revenue
adjustments are designed to be cost-based and balance the total revenues to the total revenue
requirement in each year.
The next section of the report will discuss the development of the sewer cost of service analysis
for District.
Development of the Cost of Service 25
Otay Water District – Sewer Cost of Service Study
4 Development of the Cost of Service
4.1 Introduction
In the previous section, the revenue requirement analysis focused on the total sources and
application of funds required to adequately fund the District’s sewer system. This section of the
report will provide an overview of the sewer cost of service analysis developed for the District.
The sewer cost of service analysis is concerned with the equitable allocation of the total sewer
revenue requirement between the various sewer customer classes of service (e.g., residential,
multi-residential, commercial). The sewer revenue requirement developed in Section 3 was
utilized in the development of the sewer cost of service analysis.
4.2 Objectives of a Cost of Service Analysis
There are two primary objectives in conducting a sewer cost of service study:
x Allocate the District’s revenue requirement among the customer classes of service
x Derive average unit costs for subsequent rate designs
The objectives of the cost of service analysis are different from determining the District’s revenue
requirement. As noted in the previous section, a revenue requirement analysis determines the
utility’s overall financial needs, while the cost of service analysis determines the fair and
equitable manner to proportionately collect the revenue requirement from the District’s various
customer classes of service.
The second rationale for conducting a cost of service analysis is to ensure that proposed rates
are designed such that it properly reflects the costs incurred by the District. For example, a sewer
utility typically incurs costs related to flow (wastewater volumes), strength, and customer cost
components. Each of these types of costs may be collected in a slightly different manner as to
allow for the development of rates that collect costs in the same manner as they are incurred.
Development of the Cost of Service 26
Otay Water District – Sewer Cost of Service Study
4.3 Determining the Customer Classes of Service
The first step in a cost of service analysis is to determine the customer classes of service. Based
on the District’s current rate schedules, the customer classes of service used within the District’s
sewer cost of service analysis were as follows:
x Residential
x Multi-Residential
x Commercial
¾ Low-Strength
¾ Medium Strength
¾ High Strength
¾ Schools
¾ Churches
In determining customer classes of service for cost of
service purposes, the objective is to group customers
together into similar or homogeneous groups based upon
facility requirements and/or flow characteristics. HDR
reviewed the current customer classes of service used by
the District and found them to be consistent with typical
industry practices.
As can be seen, the commercial class of service has been
segregated between low-strength, medium strength and
high-strength customers. This allows for the development
of cost-based sewer rates for commercial customers
reflective of their relative wastewater strength levels.
4.4 General Cost of Service Procedures
In order to determine the cost to serve each customer class
of service on the District’s sewer system, a cost of service
analysis is conducted. A cost of service study utilizes a
three-step approach to review costs. These steps take the
form of functionalization, allocation and distribution.
Provided below is a detailed discussion of the sewer cost
of service study conducted for the District, and the specific
steps taken within the analysis.
4.4.1 Functionalization of Costs
The first analytical step in the cost of service process is
called functionalization. Functionalization is the
arrangement of expenses and asset (plant) data by major
operating functions (e.g., collection, pumping). Within this
Terminology of a Sewer Cost of Service Analysis
Functionalization – The arrangement of
the cost data by functional category (e.g.
collection, pumping, treatment).
Allocation – The assignment of
functionalized costs to cost components
(e.g. volume, strength, and customer
related).
Distribution – Distributing the allocated
costs to each class of service based upon
each class’s proportional contribution to
that specific cost component.
Volume-Related Costs – Costs that are
classified as volume related vary with
the total flow of wastewater (e.g.,
power for pumping).
Strength-Related Costs – Costs
classified as strength related refer to the
wastewater treatment function.
Typically, strength-related costs are
further defined as biochemical oxygen
demand (BOD) and suspended solids
(SS). Different types of customers may
have high wastewater strength
characteristics and high strength
wastewater costs more to treat.
Treatment facilities are often designed
and sized around meeting these costs.
Customer-Related Costs – Costs
classified as customer related vary with
the number of customers on the system,
e.g., billing costs.
Direct Assignment – Costs that can be
clearly identified as belonging to a
specific customer group or group of
customers.
Development of the Cost of Service 27
Otay Water District – Sewer Cost of Service Study
study, there was a limited amount of functionalization of the cost data, as the District’s records
functionalized a majority of the costs.
4.4.2 Allocation of Costs
The second analytical task performed in a sewer cost of service study is the allocation of the costs.
Allocation determines why the expenses were incurred or what type of need is being met. The
following cost allocators were used to develop the cost of service analysis:
x Volume-Related Costs: Volume related costs are those costs which tend to vary with the
total quantity of wastewater collected and treated.
x Strength-Related Costs: Strength related costs are those costs associated with the
additional handling and treatment of high “strength” wastewater. Strength of wastewater
is typically measured in biochemical oxygen demand4 (BOD) and total suspended solids5
(SS). Increased levels of BOD or SS generally equate to increased treatment costs.
x Customer-Related Costs: Customer-related costs vary with the addition or deletion of a
customer or a cost which is a function of the number of customers served. Customer related
costs typically include the costs of billing, collecting, and accounting.
x Revenue-Related Costs: Some costs associated with the utility may vary with the amount
of revenue received by the utility. An example of a revenue related cost would be a utility
tax which is based on gross utility revenue.
As a part of this study, the District’s plant in service (assets) were functionalized and allocated.
Provided below in Table 4 – 1 is a summary of the functionalization and allocation of the plant
in service.
Table 4 - 1
Summary of the Functionalization and Allocation
of the District’s Sewer Plant in Service
Asset Category
Volume
Related
BOD
Related
Sus. Solids
Related
Customer
Related
Revenue
Related
Collection 85.0% 0.0% 0.0% 15.0% 0.0%
Treatment 40.0% 30.0% 30.0% 0.0% 0.0%
Lift Stations 100.0% 0.0% 0.0% 0.0% 0.0%
General Plant 83.8% 0.8% 0.8% 14.6% 0.0%
Total Net Plant In Service 83.8% 0.8% 0.8% 14.6% 0.0%
4 BOD is the amount of dissolved oxygen that must be present in water in order for microorganisms to decompose
the organic matter in the wastewater.
5 TSS is the entire amount of organic and inorganic particles dispersed in wastewater.
Development of the Cost of Service 28
Otay Water District – Sewer Cost of Service Study
The allocation of the plant in service was based upon generally accepted cost of service principles.
The details of the functionalization and classification of plant in service can be found on Exhibit
10 of the Technical Appendix.
The allocation of the revenue requirement followed a similar approach as the plant in service. As
a general cost of service rule, the expense for a plant item should follow the corresponding
allocation of the related plant item. For example, the operation and maintenance of collection
lines should be allocated in the same manner as the corresponding plant in service (e.g.,
collection plant). This approach has been used within this cost of service analysis. Provided below
in Table 4 - 2 is a summary of the allocation of the FY 2021 total revenue requirements.
Table 4 – 2
Summary of the Allocation of the FY 2021 Revenue Requirement ($000’s)
Total
Volume
(VOL)
Biochemical
Oxygen
Demand
(BOD)
Suspended
Solids
(SS)
Customer
Related
(AC + WCA)
Revenue
Related
(RR)
$2,743 $1,298 $159 $177 $1,108 $0
100.0% 47.3% 5.8% 6.5% 40.4% 0.0%
The detailed exhibit of the functionalization and allocation of the District’s sewer revenue
requirement can be found on Exhibit 11 of the Technical Appendix.
4.4.3 Development of the Distribution Factors
Once the allocation process is complete, and the customer groups have been defined, the various
allocated costs are then distributed to each customer class of service. The District’s costs were
distributed to the customer classes of service using the following distribution factors.
x Volume Distribution Factor: Volume-related costs are generally distributed on the basis of
the estimated contribution to wastewater flows. Unlike water usage, wastewater is not
metered and must be estimated. The basis for estimating wastewater contributions is a
customer’s water consumption data. However, for residential and multi-residential,
wastewater flows were calculated based on 85% of the average winter use (January
through April of the previous year). The use of winter water use and the 85% adjustment
factor is intended to eliminate outdoor water use from the sewer billing which clearly does
not enter the collection system and return to the wastewater treatment plant. In contrast
to residential and multi-residential, wastewater flow estimates for commercial customers
is based upon 85% of their billed annual water usage. Additionally, most large commercial
customers with significant landscaping have a separate irrigation meter. Given the
estimated volumes of wastewater from each class of service, a proportional distribution
factor was developed. The volume distribution factor developed as a part of this study can
be found on Exhibit 6 within the Technical Appendix.
Development of the Cost of Service 29
Otay Water District – Sewer Cost of Service Study
x Strength Distribution Factor: Strength-related costs are distributed between BOD and SS.
Both of these types of costs are distributed to each of the classes of service based upon the
assumed domestic strength level of 220 mg/l for BOD and 240 mg/l for SS. For the medium
strength customer class, 460 mg/l for BOD and SS was used. Lastly, for high strength
customer class a BOD of 1,000 mg/l was used and 1,000 mg/l of SS. The strength levels were
based on historical District information and industry data. The detailed strength distribution
factor developed for this cost of service can be found on Exhibit 8 of the Technical Appendix.
x Customer Distribution Factor: Customer costs within the cost of service analysis are
distributed to the various customer classes of service based upon their respective customer
counts. Two types of customer distribution factors were developed; actual and weighted.
The actual customer distribution factor assumes that there is no disproportionate cost
associated with serving a customer (e.g., postage for bills is the same regardless of the size
or usage of the customer) and is based on the number of actual accounts. In contrast, a
weighted customer distribution factor assumes that there is some disproportionality
associated with serving different types of customers and attempts to estimate the level of
difference in serving the customers. For the District’s study, the weighting factors were
based on the safe operating capacity of a meter based on the AWWA standards. This
distribution is done in order to reflect the capacity of a water meter and, therefore, show
the potential impact to the sewer system based on water meter size. The development of
the customer distribution factors can be found on Exhibit 7 of the Technical Appendix.
x Revenue-Related Distribution Factor: The revenue-related distribution factor was
developed from the projected rate revenues for FY 2021. The revenue-related allocation
factor can be found on Exhibit 9 of the Technical Appendix.
x Direct Assignment: Any costs that can be identified or shown to be directly related to a
specific customer class are directly assigned within the cost of service study. In this
particular study, there were no direct assignments.
The development of distribution factors is based on generally accepted cost of service principles
as discussed in the Water Environment Federation, Manual of Practice #27.
4.5 Summary of the Sewer Cost of Service Analysis
In summary form, the cost of service analysis began by functionalizing the District’s plant asset
records and O&M expenses. The functionalized plant and expense accounts were then allocated
into their various cost components. Next, the individual allocation totals were then distributed
to the various customer groups based on the appropriate distributed factors. For example,
volume-related costs were distributed based on each customer class’ share of total wastewater
contributions. The total costs classified to each cost component were distributed between the
customer classes using the distribution factors. Table 4 – 3 provides a summary of distributed
cost components to each customer class of service.
Development of the Cost of Service 30
Otay Water District – Sewer Cost of Service Study
Table 4 – 3
Summary of the Distributed FY 2021
Revenue Requirement ($000’s)
Classified Costs Total Residential
Multi-
Residential Commercial
Volume $1,298 $979 $152 $167
BOD 160 115 18 27
TSS 177 128 20 29
Customer 1,108 904 105 98
RR 0 0 0 0
DA 0 0 0 0
Total $2,743 $2,127 $295 $321
The distributed expenses for each customer group were then aggregated to determine each
customer group’s overall revenue responsibility. Provided in Table 4 – 4 is a summary of the
District’s sewer cost of service analysis.
Table 4 – 4
Summary of the Sewer Cost of Service ($000)
Customer Class of Service
Revenues at
Present
Rates
Allocated
Revenue
Requirement
Bal. / (Def.)
of Funds
Required %
Change in
Rates
Low Strength [1] $2,658 $2,652 $6 -0.2%
Medium Strength 31 33 (2) 5.4%
High Strength 53 57 (4) 7.5%
Total $2,743 $2,743 ($0) 0.0%
[1] – Low Strength includes Residential, Multi-Residential, and Low Commercial
The above results indicate that the customer classes of service are at or near their cost of service.
This means that the District’s overall sewer rate revenues collected from each customer class of
service is reasonably close to their “cost of service” and reflect the proportional allocation of
costs. In making this statement, it is important to note that a cost of service study is an analysis
of a point in time and the District’s sewer costs, customer consumption patterns and total
wastewater volumes will vary and change over time.
Development of the Cost of Service 31
Otay Water District – Sewer Cost of Service Study
4.6 Summary of the Average Unit Costs
As noted at the start of this section of the report, there are two key pieces of information which
are derived from the cost of service analysis; the equitable distribution of the total revenue
requirement (i.e., total costs) and the calculation of the average unit costs. Average unit costs
are essentially cost-based rates in that they are derived from the allocated costs within the cost
of service study. Each allocated cost is divided by the appropriate billing unit (e.g., number of
accounts or wastewater volumes) and a per unit charge or cost is derived. Provided below in
Table 4 – 5 is a summary of the average unit costs for the District’s sewer cost of service analysis.
Table 4 – 5
Summary of the Sewer Cost of Service Unit Costs
Total Residential
Multi-
Residential Commercial
Variable Costs ($ / CCF) $2.86 $2.83 $3.34 $4.64
Customer Costs ($ / Cust / Mo) $16.36
The average unit costs shown in Table 4 – 5 will be used to develop the final proposed sewer
rates. A more detailed discussion of the development of the proposed sewer rate designs can be
found on in the next section of the report.
4.7 Consultant’s Cost of Service Conclusions and Recommendations
The sewer cost of service analysis conducted for the District utilized generally accepted cost of
service principles and methodologies. The results indicated some minor cost differences between
the various customer classes of service, but no significant cost issues. It is recommended that the
results of the cost of service be used in the development of the final proposed sewer rate designs.
By using the results of the cost of service analysis the District’s rates will be cost-based and reflect
the requirements of Proposition 218, as it is currently understood.
4.8 Summary
This section of the report has discussed the sewer cost of service analysis developed for the
District. This analysis reflects the specific and unique characteristics of the District’s sewer system
and was developed using generally accepted cost of service techniques and principles. The next
section of the report will review the present and proposed sewer rates for the District.
Development of the Sewer Rate Design 32
Otay Water District – Comprehensive Sewer Rate Study
5 Development of the Sewer Rate Design
5.1 Introduction
The final step of the District’s comprehensive sewer rate study is the design of proposed sewer
rates to collect the target levels of revenues, based upon the results of the revenue requirement
and cost of service analyses. In reviewing District’s rates, consideration is given to both the level
of the rates and the structure of the rates. Level refers to the amount of revenue to be collected
from the rate design and structure refers to the way in which it is collected (e.g., fixed charges,
volumetric charges).
5.2 Rate Design Criteria and Considerations
Prudent rate administration dictates that several criteria must be considered when setting utility
rates. Some of these rate design criteria are listed below:
x Rates which are easy to understand from the customer’s perspective
x Rates which are easy for the utility to administer
x Consideration of the customer’s ability to pay
x Continuity, over time, of the rate making philosophy
x Policy considerations (encourage efficient use, economic development, etc.)
x Provide revenue stability from month-to-month and year-to-year
x Promote efficient allocation of the resource
x Equitable and non-discriminatory (cost-based)
x Compliance with any State laws or requirements
It is important that the District provide its customers with an appropriate price signal as to how
much the wastewater services cost. This goal may be approached through the rate designs level
and structure. When developing the proposed rate designs, all the above-listed criteria were
taken into consideration. It should be noted that it is difficult - if not impossible - to design a rate
that meets all of the goals and objectives listed above. For example, it may be difficult to design
a sewer rate that takes into consideration customers’ ability to pay and one which is cost-based.
However, to meet the intent of Proposition 218, equitable and cost-based rates are the key
components that needs to be considered when developing the District’s proposed sewer rates.
Although the other goals and objectives may be taken into consideration to develop the rate
structure, the proposed rates are ultimately based on the cost of service analysis to meet the
intent of Proposition 218.
5.3 Development of Cost-Based Sewer Rates
A key objective for this study is to meet the legal requirements of Proposition 218 and clearly
document the steps taken to meet those requirements. This results in the development of cost-
based and equitable sewer rates. Given this, the development of the District’s proposed sewer
rates have been closely reviewed to meet the legal requirements of California Constitution article
XIII D, section 6 (Article XIII D). A key component of Article XIII D is the development of rates
which reflect the cost of providing service and are proportionally distributed between the various
Development of the Sewer Rate Design 33
Otay Water District – Comprehensive Sewer Rate Study
customer classes of service. HDR would point out that there is not a single methodology for
equitably assigning sewer costs to the various customer groups. The Water Environment
Federation Manual of Practice No. 27 provides various and differing methodologies which may
be used to establish cost-based sewer rates. Unfortunately, Article XII D is not prescriptive and
does not provide a single or specific methodology for establishing legally compliant sewer rates.
Given that, HDR conducted this study using generally accepted rate setting methodologies,
tailored to the District’s specific facilities and customers, in order meet the intent (i.e.,
requirements) of Article XIII D. Furthermore, the rate setting methodology used in the District’s
study are based on the WEF MOP #27 and are, therefore, reasonable and appropriate.
HDR is of the opinion that the proposed rates meet the legal requirements of Article XIII D. HDR
reaches this conclusion based upon the following:
x The revenue derived from sewer rates does not exceed the funds required to provide the
property related service (i.e., sewer service). The proposed rates are designed to collect
the overall revenue requirement of the District’s sewer system.
x The revenues derived from sewer rates shall not be used for any purpose other than that
for which the fee or charge is imposed. The revenues derived from the District’s sewer
rates are used exclusively to operate and maintain the District’s sewer system.
x The amount of a fee or charge imposed upon a parcel or person as an incident of property
ownership shall not exceed the proportional costs of the service attributable to the
parcel. This cost of service analysis, and this report, has focused on the issue of
proportional assignment of costs to customer classes of service in accordance with
generally accepted cost of service principles. The proposed rates have appropriately
grouped customers into customer classes of service (e.g., residential, multi-residential,
commercial) that reflect the varying consumption patterns and system requirements (i.e.,
the benefits they receive from and burdens they place on the system) of each customer
class of service. The grouping of customers and rates into these classes of service creates
the equity and fairness expected under Proposition 218 by having differing rates by
customer classes of service which reflect both the level of revenue to be collected by the
utility, and the manner in which these costs are incurred and equitably assigned to
customer classes of service based upon their proportional impacts.
5.4 Overview of the Present Sewer Rate Structure
The District currently has three rate schedules; a residential rate schedule, a multi-residential
rate schedule, and a commercial rate schedule. Provided below is a more detailed discussion of
the present rate structures by customer class of service.
Residential - The District’s current residential sewer rate has a flat monthly fixed charge and a
variable consumption charge based on 85% of the customers’ winter water average. As
mentioned previously, as part of the rate study update and evaluation of alternative residential
rate structures, it is recommended that the District transition to a 3-year average for the winter
water average calculation. The winter water average for wastewater volume contribution
estimation is a generally-accepted sewer rate structure and it is used by sewer utilities across
Development of the Sewer Rate Design 34
Otay Water District – Comprehensive Sewer Rate Study
California and the U.S. The fixed charge provides revenue stability for the District as well as
reflects the fact that the majority of the District’s costs are fixed in nature and not a function of
the volume of wastewater contributed or conveyed on the system. As noted under the discussion
of the volume allocation factor, the reasoning behind billing residential customers on 85% of
average winter water use is to attempt to extract outdoor use or non-returned usage.
Multi-Residential - Multi-residential customers have essentially the same rate structure as
residential customers. The rate design has a fixed monthly charge and a volumetric component
charged on 85% of the customer’s winter water average. As with the residential customer class,
it is recommended that the District transition the winter water average calculation to a three
year average. An important difference between residential and multi-residential is that the fixed
component for multi-residential is based upon the service meter size. This is done in an attempt
to reflect the fact that a customer with a larger meter has the potential to use a great amount of
system capacity. Just as with residential, the consumption charge is based on the average winter
water usage to reflect a customers’ sewer flow contribution.
Commercial - Commercial customers also have a similar structure to both residential and multi-
residential with a fixed monthly charge based on meter size with a volumetric consumption
charge on a per CCF basis. There are two key differences in the commercial rates compared to
the other rates. First, the commercial rate is segregated between low, medium and high-strength
wastewater. Additionally, commercial customers are billed on 85% of their average annual
consumption as opposed to just the winter water average as is used for residential and multi-
residential customers. As noted within the discussion of the volume distribution factor this
difference in determining volumetric billing units is based upon the assumption that large
commercial customers will have an irrigation meter for outdoor water use and therefore
domestically metered water should closely represent their wastewater flow contributions.
5.5 Development of the Proposed Sewer Rates
The revenue requirement analysis was used to determine the adequate and prudent level of
funding needed to operate the District’s sewer system. The results of the revenue requirement
analysis provided the recommended rate adjustments needed to fully fund the District’s sewer
utility.
Given the development of the overall revenue needs of the utility, the next component of the
sewer rate study was the cost of service analysis. The average unit costs calculated in the cost of
service analysis in Section 4.6 are used within the design of the final proposed rates. In doing so,
the average unit costs are reflective of the distribution of costs to each specific customer class of
service, but more importantly, provides the cost-basis for the relationship between the fixed and
volumetric charges. Provided below in Table 5 - 1 is a summary of the present and proposed
sewer rates for the District.
Development of the Sewer Rate Design 35
Otay Water District – Comprehensive Sewer Rate Study
Table 5 – 1
Summary of the Present and Proposed Sewer Rates
Present
Rates FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Fixed Charge ($/Month)
Residential
Monthly System Fee $16.38 $16.13 $17.10 $18.22 $19.15 $20.60
Multi-Resident. / Comm.
3/4" $16.38 $16.13 $17.10 $18.22 $19.15 $20.60
1" 40.94 40.32 42.74 45.54 47.86 51.49
1-1/2" 81.88 80.63 85.48 91.08 95.73 102.97
2" 131.00 129.00 136.76 145.72 153.15 164.75
3" 245.64 241.89 256.44 273.23 287.18 308.92
4" 409.40 403.15 427.40 455.39 478.63 514.87
6" 818.79 806.29 854.78 910.77 957.25 1,029.74
8" 1,310.08 1,290.08 1,367.67 1,457.24 1,531.63 1,647.60
10" 1,883.23 1,854.49 1,966.01 2,094.78 2,201.70 2,368.41
Variable Charge ($/CCF)
Residential
Billed @ 85% of WW Avg $2.93 $2.89 $3.06 $3.26 $3.42 $3.59
Multi-Residential
Billed @ 85% of WW Avg $2.93 $2.89 $3.06 $3.26 $3.42 $3.59
Commercial
Low Strength $2.93 $2.89 $3.06 $3.26 $3.42 $3.59
Schools 2.93 2.89 3.06 3.26 3.42 3.59
Churches 2.93 2.89 3.06 3.26 3.42 3.59
Medium Strength 3.64 3.29 3.49 3.71 3.90 4.09
High Strength 5.01 4.63 4.91 5.23 5.48 5.76
In viewing the present and proposed rate designs it should be noted that the structure of the
fixed rates has not changed. However, as noted the calculation of the winter water average for
residential and multi-residential has moved to a 3-year average. The proposed rates are shown
based on the cost of service adjustment for FY 2021 and the proposed rate adjustments in FY
2022 through FY 2025. The customer bill impacts from these proposed rates will vary by customer
class of service and by consumptive use. As an example, in FY 2021 and for a typical residential
customer being billed 8 CCF / month, their monthly bill will change from $39.82 currently to
$39.25 under the proposed rates or an decrease of $0.57.
Shown below in Table 5 – 2 is a summary of the allocated costs and the revenue that the proposed
rates are calculated to produce.
Development of the Sewer Rate Design 36
Otay Water District – Comprehensive Sewer Rate Study
Table 5 – 2
FY 2021 Proposed Revenues and Allocated Costs ($000’s)
Present
Revenues
Allocated
Revenues
Proposed
Revenues
Low Strength [1] $2,164 $2,127 $2,119
Medium Strength 280 295 296
High Strength 298 321 330
Total $2,743 $2,743 $2,744
5.6 Consultant’s Rate Design Conclusions and Recommendations
The development of the proposed sewer rates is based on the overall level of revenues developed
as part of the revenue requirement analysis and the proportional allocation of costs to the
customer classes of service based on the cost of service recommendations. HDR would
recommend the adoption of the proposed rates which are cost-based, equitable, proportionate
to the cost of service, and reflect the specific costs of the District’s sewer system.
5.7 Summary
This completes the comprehensive sewer rate study for the District. This study has provided a
comprehensive review of the District’s sewer rates. The study is intended to provide to the
District a set of cost-based rates that will allow the District to meet their current and projected
sewer system financial obligations and major capital projects for the time period reviewed, while
meeting the requirements of Proposition 218.
Technical Appendix
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Revenues
Rate Revenues $2,871,898 $2,742,663 $2,742,663 $2,742,663 $2,742,663 $2,742,663
Other Revenues 107,500 173,666 255,432 357,399 529,265 116,332------------------------------------------------------------------------------------------Total Revenues $2,979,398 $2,916,329 $2,998,095 $3,100,061 $3,271,928 $2,858,995
Expenses
Total Operations & Maintenance $2,795,300 $2,822,259 $2,915,938 $3,017,364 $3,123,297 $3,270,326
Total Taxes / Transfer 39,400 41,200 43,200 45,600 48,200 51,700
Rate Funded Capital 0 0 0 0 0 0
Net Debt Service 0 0 0 0 0 0
Total To / (From) Reserves 144,698 52,870 162,376 390,064 673,188 345,120------------------------------------------------------------------------------------------Total Expenses $2,979,398 $2,916,329 $3,121,515 $3,453,028 $3,844,685 $3,667,146
Bal. / (Def.) of Funds $0 $0 ($123,420)($352,967)($572,757)($808,151)
Bal. as a % of Rate Revenues 0.0%0.0%4.5%12.9%20.9%29.5%
Proposed Rate Adjustment 0.0%0.0%9.0%7.1%7.1%7.1%
Add'l Revenue from Adj.$0 $0 $123,420 $352,967 $572,757 $808,151
Total Bal. / (Def.) of Funds $0 $0 $0 ($0)$0 $0
Add'l Rate Increase Needed 0.0%0.0%0.0%0.0%0.0%0.0%
Avg Residential Monthly Bill (Flat rate + 12 CCF)$51.54 $51.54 $56.18 $60.17 $64.44 $69.01
Debt Service Coverage Ratio
Before Rate Adjustment 4.14 0.71 0.36 0.22 0.39 N/A
After Proposed Rate Adj.4.14 N/A N/A 1.15 1.91 1.05
Ending Balance $4,181,481 $3,746,264 $6,536,988 $5,700,364 $4,816,837 $3,469,411
Revenue Requirement Summary
Exhibit 1
Sewer Cost of Service Study
Otay Water District
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Exhibit 2
Escalation Factors
Budget
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Revenues
As Customer GrowthCustomer Growth Budget -4.50%0.0%0.0%0.0%0.0%
As Miscellaneous RevenuesMiscellaneous Revenues Budget 0.3%0.3%0.3%0.3%0.3%
As FlatFlat Budget 0.0%0.0%0.0%0.0%0.0%
Expenses
As LaborLabor Budget 3.0%3.0%3.0%3.0%3.0%
As Benefits - OtherBenefits - Other Budget 3.0%3.0%3.0%3.0%3.0%
As Benefits - MedicalBenefits - Medical Budget 5.5%5.0%5.0%5.0%5.0%
As Materials & MaintenanceMaterials & Maintenance Budget 4.0%4.0%4.0%4.0%4.0%
As AdministrativeAdministrative Budget 3.0%3.0%3.0%3.0%3.0%
As EquipmentEquipment Budget 4.0%4.0%4.0%4.0%4.0%
As MiscellaneousMiscellaneous Budget 2.0%2.0%2.0%2.0%2.0%
As FlatFlat Budget 0.0%0.0%0.0%0.0%0.0%
As UtilitiesUtilities Budget 3.0%3.0%3.0%3.0%3.0%
As PowerPower Budget 5.0%4.0%4.0%4.0%4.0%
Growth Budget -4.5%0.0%0.0%0.0%0.0%
Interest Earnings 1.2%1.3%1.5%1.6%1.8%1.9%
Revenue Bond
Term in Years 20 20 20 20 20 20
Interest Rate 5.0%5.0%5.0%5.0%5.0%5.0%
Projected
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Exhibit 3
Revenue Requirement
Budget
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Revenues
Rate Revenues
Residential $2,266,213 $2,164,233 $2,164,233 $2,164,233 $2,164,233 $2,164,233 As Customer Growth
Multi-Residential 293,688 280,472 280,472 280,472 280,472 280,472 As Customer Growth
Commercial
Low Strength $223,120 $213,079 $213,079 $213,079 $213,079 $213,079 As Customer Growth
Medium Strength 32,936 31,454 31,454 31,454 31,454 31,454 As Customer Growth
High Strength 55,942 53,424 53,424 53,424 53,424 53,424 As Customer Growth------------------------------------------------------------------------------------------Total Rate Revenues $2,871,898 $2,742,663 $2,742,663 $2,742,663 $2,742,663 $2,742,663
Other Revenues
Availability Revenues $52,200 $51,900 $52,100 $52,400 $52,600 $52,900 District Provided
Sewer Revenue from Shared Facility (SVSD)28,300 29,700 31,200 32,800 34,400 36,100 District Provided
Late Fee 22,000 22,066 22,132 22,199 22,265 22,332 As Miscellaneous Revenues
Grants - SDCWA Shared Facil Replcmnt 5,000 70,000 150,000 250,000 420,000 5,000 District Provided------------------------------------------------------------------------------------------Total Other Revenues $107,500 $173,666 $255,432 $357,399 $529,265 $116,332
Total Revenue $2,979,398 $2,916,329 $2,998,095 $3,100,061 $3,271,928 $2,858,995
Power Costs $154,300 $162,015 $168,496 $175,235 $182,245 $189,535 As Power
Administrative Expenses
Directors Fees $0 $0 $0 $0 $0 $0 As Labor
Travel and Meetings 0 0 0 0 0 0 As Miscellaneous
Conservation and Outreach 0 0 0 0 0 0 As Labor
General Office Expense 0 0 0 0 0 0 As Materials & Maintenance
Equipment 23,300 23,999 24,719 25,461 26,224 27,011 As Administrative
Fees 3,800 3,914 4,031 4,152 4,277 4,405 As Administrative
Services 50,300 51,809 53,363 54,964 56,613 58,311 As Administrative
Training 0 0 0 0 0 0 As Labor
Utilities 0 0 0 0 0 0 As Utilities
Bad Debt Expense 4,300 4,300 4,300 4,300 4,300 4,300 As Flat
Interest Expense 0 0 0 0 0 0 As Miscellaneous
Other Employee Benefits 0 0 0 0 0 0 As Benefits - Other
WO Allocation - Sewer 200,200 204,204 208,288 212,454 216,703 221,037 As Miscellaneous------------------------------------------------------------------------------------------Total Administrative Expenses $281,900 $288,226 $294,702 $301,331 $308,117 $315,065
Notes
Projected
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Exhibit 3
Revenue Requirement
Budget
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Notes
Projected
Materials & Maintenance
Fuel & Oil $0 $0 $0 $0 $0 $0 As Utilities
Meters & Materials 0 0 0 0 0 0 As Materials & Maintenance
Fleet Parts & Equipment 8,000 8,320 8,653 8,999 9,359 9,733 As Equipment
Communication Equipment 0 0 0 0 0 0 As Equipment
Landscaping Materials 0 0 0 0 0 0 As Materials & Maintenance
Infrastructure Equipment & Supplies 132,900 138,216 143,745 149,494 155,474 161,693 As Equipment
Chemicals 27,400 28,496 29,636 30,821 32,054 33,336 As Materials & Maintenance
Safety Equipment 7,000 7,280 7,571 7,874 8,189 8,517 As Equipment
Laboratory Equipment & Supplies 5,600 5,824 6,057 6,299 6,551 6,813 As Equipment
Other Materials & Supplies 100 104 108 112 117 122 As Materials & Maintenance
Building & Grounds Materials 0 0 0 0 0 0 As Materials & Maintenance
Contracted Services 158,800 165,152 171,758 178,628 185,774 193,204 As Materials & Maintenance
Metro O&M Costs 600,900 630,945 662,492 695,617 730,398 803,437 District Provided
Spring Valley Sewer Charge 251,100 185,200 185,200 185,200 185,200 185,200 District Provided
Chula Vista Capacity Fee 0 0 0 0 0 0 As Miscellaneous
Metro Capacity Fee 0 0 0 0 0 0 As Miscellaneous------------------------------------------------------------------------------------------Total Materials & Maintenance $1,191,800 $1,169,537 $1,215,220 $1,263,046 $1,313,116 $1,402,056
Labor & Benefits
Labor $472,500 $486,675 $501,275 $516,314 $531,803 $547,757 As Labor
WO Allocation - Sewer 343,200 353,496 364,101 375,024 386,275 397,863 As Labor
Vacation/Sick/Holidays 47,100 48,513 49,968 51,467 53,011 54,602 As Benefits - Other
FICA (Soc Sec/Medicare)36,000 37,080 38,192 39,338 40,518 41,734 As Benefits - Other
Pension 81,600 84,048 86,569 89,167 91,842 94,597 As Benefits - Other
Health/Dental/Life Insurance 94,300 99,487 104,461 109,684 115,168 120,926 As Benefits - Medical
Worker's Compensation 49,600 52,328 54,944 57,692 60,576 63,605 As Benefits - Medical
Salary Continuation Insurance 1,800 1,854 1,910 1,967 2,026 2,087 As Benefits - Other
Employee Awards 0 0 0 0 0 0 As Benefits - Other
OPEB 41,200 39,000 36,100 37,100 38,600 40,500 District Provided
State Unemployment Insurance 0 0 0 0 0 0 As Benefits - Other
Employee Assistance Program 0 0 0 0 0 0 As Benefits - Other
Employee Programs 0 0 0 0 0 0 As Benefits - Other
Uniforms 0 0 0 0 0 0 As Benefits - Other------------------------------------------------------------------------------------------Total Labor & Benefits $1,167,300 $1,202,481 $1,237,521 $1,277,752 $1,319,819 $1,363,670
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Exhibit 3
Revenue Requirement
Budget
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Notes
Projected
Taxes / Transfer
General Fund $0 $0 $0 $0 $0 $0 As Miscellaneous
Betterment Fund 0 0 0 0 0 0 As Miscellaneous
Replacement Fund 0 0 0 0 0 0 As Miscellaneous
OPEB Fund 39,400 41,200 43,200 45,600 48,200 51,700 District Provided------------------------------------------------------------------------------------------Total Taxes / Transfer $39,400 $41,200 $43,200 $45,600 $48,200 $51,700
Rate Funded Capital $0 $0 $0 $0 $0 $0
Debt Service
Existing Debt $0 $0 $0 $0 $0 $0
New Sewer Loan 0 0 0 0 0 0 Calculated @ 1.7% for 30 yrs
FY 2020 Issuance 44,467 133,400 177,275 177,275 177,275 177,275 District Provided
FY 2022 Issuance 0 0 51,137 201,250 201,250 201,250 District Provided------------------------------------------------------------------------------------------Total Debt Service $44,467 $133,400 $228,412 $378,525 $378,525 $378,525
Total Less Replacement Reserves $44,467 $133,400 $228,412 $378,525 $378,525 $378,525
Net Debt Service $0 $0 $0 $0 $0 $0
To / (From) Reserves
To / (From) Operating Reserves ($567,302)($172,130)($351,824)($380,536)($406,012)($421,680)District Provided
To / (From) Replacement Reserves 143,000 (118,000)20,000 75,000 417,000 250,000 District Provided
To / (From) Betterment Reserves 523,000 288,000 389,200 531,600 556,200 516,800 District Provided
To / (From) Expansion Reserves 46,000 55,000 105,000 164,000 106,000 0 District Provided------------------------------------------------------------------------------------Total To / (From) Reserves $144,698 $52,870 $162,376 $390,064 $673,188 $345,120 FY 2016 Depr. Exp. =$1,017,180
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Exhibit 3
Revenue Requirement
Budget
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Notes
Projected
Total Revenue Requirement $2,979,398 $2,916,329 $3,121,515 $3,453,028 $3,844,685 $3,667,146
Bal. / (Def.) of Funds $0 $0 ($123,420)($352,967)($572,757)($808,151)
Bal. as a % of Rate Revenues 0.0%0.0%4.5%12.9%20.9%29.5%
Proposed Rate Adjustment 0.0%0.0%9.0%7.1%7.1%7.1%
Months of Adjustment 6 6 6 6 6 6 Jan 1 st Implementation
Add'l Revenue from Adj.$0 $0 $123,420 $352,967 $572,757 $808,151
Total Bal. / (Def.) of Funds $0 $0 $0 ($0)$0 $0
Add'l Rate Increase Needed 0.0%0.0%0.0%0.0%0.0%0.0%
Avg Residential Monthly Bill (Flat rate + 12 CCF)
After Rate Adjustment $51.54 $51.54 $56.18 $60.17 $64.44 $69.01
Annual $ Change 0.00 0.00 4.64 3.99 4.27 4.58
Debt Service Coverage Ratio
Before Rate Adjustment 4.14 0.71 0.36 0.22 0.39 N/A
After Proposed Rate Adj.4.14 N/A N/A 1.15 1.91 1.05
Beginning Balance $3,242,849 $4,181,481 $3,746,264 $6,536,988 $5,700,364 $4,816,837
Sewer Operating Reserves
Beginning Cash Reserve Balance $1,255,463 $699,823 $535,672 $189,244 ($191,308)($604,418)
Plus: Additions 0 0 0 0 0 0
Interest 11,662 7,979 5,396 (16)(7,098)(15,490)
Less: Transfer to Betterment 0 0 0 0 0 0
Less: Uses of Funds (567,302)(172,130)(351,824)(380,536)(406,012)(421,680)
Ending Balance $699,823 $535,672 $189,244 ($191,308)($604,418)($1,041,587)
Target Minimum - 90 Days of O&M $689,252 $695,899 $718,999 $744,008 $770,128 $806,382
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Exhibit 3
Revenue Requirement
Budget
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Notes
Projected
Sewer Replacement Reserves
Beginning Cash Reserve Balance $1,287,812 $3,329,994 $2,820,187 $5,575,159 $4,932,558 $4,444,702
Plus: Additions 143,000 0 20,000 75,000 417,000 250,000
Plus: Debt Proceeds 3,000,000 0 3,450,000 0 0 0
Interest 9,649 39,718 36,814 83,395 83,643 75,011
Less: Debt Funding (44,467)(133,400)(228,412)(378,525)(378,525)(378,525)
Less: Uses of Funds (1,066,000)(416,125)(523,430)(422,470)(609,974)(864,986)
Ending Balance $3,329,994 $2,820,187 $5,575,159 $4,932,558 $4,444,702 $3,526,202
Target Minimum - 4% of current assets $1,558,500 $1,582,300 $1,625,900 $1,656,100 $1,703,000 $1,744,700
Sewer Betterment Reserves
Beginning Cash Reserve Balance $722,460 $131,051 $263,805 $502,172 $571,250 $647,084
Plus: Additions 523,000 288,000 389,200 531,600 556,200 516,800
Plus: Transfer From Operating 0 0 0 0 0 0
Interest 5,091 2,550 5,702 8,519 10,867 12,221
Less: Uses of Funds (1,119,500)(157,795)(156,535)(471,042)(491,233)(524,507)
Ending Balance $131,051 $263,805 $502,172 $571,250 $647,084 $651,598
Target Min - 180 days of Betterment exp.$77,817 $77,195 $232,295 $242,252 $258,661 $258,661
Sewer Expansion Reserves
Beginning Cash Reserve Balance ($22,886)$20,614 $126,600 $270,412 $387,863 $329,469
Plus: Additions 46,000 55,000 105,000 164,000 106,000 0
Plus: Capacity Fees 0 71,115 72,892 74,715 0 0 District Provided
Interest 0 951 2,955 5,224 6,398 6,236
Less: Uses of Funds (2,500)(21,080)(37,035)(126,488)(170,793)(2,507)
Ending Balance $20,614 $126,600 $270,412 $387,863 $329,469 $333,198
Target Min - 180 days of Expansion exp.$29,622 $30,511 $31,426 $32,369 $33,340 $34,340
Ending Balance $4,181,481 $3,746,264 $6,536,988 $5,700,364 $4,816,837 $3,469,411
Total Minimum Reserve Level $2,355,191 $2,385,906 $2,608,619 $2,674,728 $2,765,129 $2,844,083
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Exhibit 4
Capital Improvement Plan
Project #FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Total Expansion Projects $2,500 $21,080 $37,035 $126,488 $170,793 $2,507
Total Betterment Projects $1,119,500 $157,795 $156,535 $471,042 $491,233 $524,507
Replacement
SDCSD / RSD Outfall Replacement S2012 $50,000 $50,000 $125,000 $125,000 $125,000 $125,000
Campo Road Sewer Main Replac. (50%)S2024 750,000 15,000 0 0 0 0
Rancho San Diego Pump Station Rehab.S2027 5,000 5,000 0 0 0 0
Fuerte Drive Sewer Relocation S2045 20,000 0 0 0 0 0
RWCWRF - Aeration Panels Replacement S2046 5,000 0 0 0 0 0
Hillsdale Road Sewer Repairs S2048 5,000 0 0 0 0 0
Calavo Basin Sewer Rehabilitation - Ph 2 S2049 40,000 200,000 740,000 5,000 0 0
Rancho San Diego Basin Sewer Rehab. - Ph 2 S2050 5,000 5,000 5,000 30,000 175,000 600,000
RWCWRF - Headworks Improvements S2051 5,000 0 0 0 0 0
RWCWRF - Sedimentation Basins Weirs Rplcmnt S2053 1,000 0 0 0 0 0
Calavo Basin Sewer Rehabilitation - Ph 3 S2054 0 0 0 0 0 10,000
Steele Canyon Pump Station Rplcmnt (75%)S2060 0 0 0 7,500 30,000 112,500
RWCWRF Aeration Controls Consolid. & Opti. Upgrades S2061 30,000 150,000 40,000 0 0 0
Rancho San Diego Basin Sewer Rehabilitation - Ph 3 S2066 0 0 0 0 0 10,000
RWCWRF Roofing Rplcmnt & Natural Light Enhanc.S2067 145,000 0 0 0 0 0
Cottonwood Sewer PS Renovation (50%)S2069 5,000 70,000 150,000 250,000 420,000 5,000------------------------------------------------------------------------------------------Total Replacement Projects $1,066,000 $298,125 $523,430 $422,470 $609,974 $864,986
Notes
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Sewer Cost of Service Study Inflation =0.0%
Exhibit 4
Capital Improvement Plan
Project #FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Notes
Future Unidentified CIP $0 $0 $0 $0 $0 $0
Transfer to Replacement Fund $0 $0 $0 $0 $0 $0
Total Capital Projects $2,188,000 $477,000 $717,000 $1,020,000 $1,272,000 $1,392,000
Less: Other Funding Sources
Sewer Operating Reserves $0 $0 $0 $0 $0 $0
Sewer Replacement Reserves 1,066,000 298,125 523,430 422,470 609,974 864,986
Sewer Betterment Reserves 1,119,500 157,795 156,535 471,042 491,233 524,507
Sewer Expansion Reserves 2,500 21,080 37,035 126,488 170,793 2,507
New Long Term Debt 0 0 0 0 0 0------------------------------------------------------------------------------------Total Less: Other Funding Sources $2,188,000 $477,000 $717,000 $1,020,000 $1,272,000 $1,392,000
Rate Funded Capital $0 $0 $0 $0 $0 $0
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Exhibit 5
Revenues at Present Rates
1-Jan-19 1-Jan-20 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Total
Residential
Fixed Charge
Monthly System Fee $14.91 $16.38 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605-------------------------------------------------------------------------------------------------------------------------------------------------$68,661 $68,661 $68,661 $68,661 $68,661 $68,661 $75,430 $75,430 $75,430 $75,430 $75,430 $75,430 $864,543
Consumption Charge
Billed @ 85% of WW Avg $2.67 $2.93 50,303 50,303 50,303 50,303 50,303 50,303 33,892 33,892 33,892 33,892 33,892 33,892 505,168--------------------------------------------------------------------------------------------------------------------------------------------------------------$134,309 $134,309 $134,309 $134,309 $134,309 $134,309 $99,303 $99,303 $99,303 $99,303 $99,303 $99,303 $1,401,670
Total Residential Revenue $202,969 $202,969 $202,969 $202,969 $202,969 $202,969 $174,733 $174,733 $174,733 $174,733 $174,733 $174,733 $2,266,213
Multi-Residential
Fixed Charge
3/4"$14.91 $16.38 0 0 0 0 0 0 0 0 0 0 0 0 0
1"37.27 40.94 0 0 0 0 0 0 0 0 0 0 0 0 0
1 1/2"74.55 81.88 0 0 0 0 0 0 0 0 0 0 0 0 0
2"119.27 131.00 39 39 39 39 39 39 39 39 39 39 39 39 39
3"223.64 245.64 5 5 5 5 5 5 5 5 5 5 5 5 5
4"368.97 409.40 6 6 6 6 6 6 6 6 6 6 6 6 6
6"729.04 818.79 0 0 0 0 0 0 0 0 0 0 0 0 0
8"1,161.15 1,310.08 0 0 0 0 0 0 0 0 0 0 0 0 0
10"1,665.25 1,883.23 0 0 0 0 0 0 0 0 0 0 0 0 0--------------------------------------------------------------------------------------------------------50 50 50 50 50 50 50 50 50 50 50 50 50
$7,984 $7,984 $7,984 $7,984 $7,984 $7,984 $8,794 $8,794 $8,794 $8,794 $8,794 $8,794 $100,663
Consumption Charge
Billed @ 85% of WW Avg $2.67 $2.93 6,160 6,160 6,160 6,160 6,160 6,160 5,366 5,366 5,366 5,366 5,366 5,366 69,159------------------------------------------------------------------------------------------------------------------------------------------------------------$16,447 $16,447 $16,447 $16,447 $16,447 $16,447 $15,724 $15,724 $15,724 $15,724 $15,724 $15,724 $193,025
Total Multi-Residential Revenue $24,431 $24,431 $24,431 $24,431 $24,431 $24,431 $24,517 $24,517 $24,517 $24,517 $24,517 $24,517 $293,688
Rates Effective
$ / CCF
$ / Acct. / Mo.
$ / Acct. / Mo.
$ / CCF
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Exhibit 5
Revenues at Present Rates
1-Jan-19 1-Jan-20 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Total
Rates Effective
Commercial
Fixed Charge
3/4"$14.91 $16.38 22 22 22 22 22 22 22 22 22 22 22 22 22
1"37.27 40.94 5 5 5 5 5 5 5 5 5 5 5 5 5
1 1/2"74.55 81.88 20 20 20 20 20 20 20 20 20 20 20 20 20
2"119.27 131.00 23 23 23 23 23 23 23 23 23 23 23 23 23
3"223.64 245.64 1 1 1 1 1 1 1 1 1 1 1 1 1
4"368.97 409.40 0 0 0 0 0 0 0 0 0 0 0 0 0
6"729.04 818.79 1 1 1 1 1 1 1 1 1 1 1 1 1
8"1,161.15 1,310.08 0 0 0 0 0 0 0 0 0 0 0 0 0
10"1,665.25 1,883.23 1 1 1 1 1 1 1 1 1 1 1 1 1-------------------------------------------------------------------------------------------------------- 73 73 73 73 73 73 73 73 73 73 73 73 73
$7,367 $7,367 $7,367 $7,367 $7,367 $7,367 $8,163 $8,163 $8,163 $8,163 $8,163 $8,163 $93,179
Consumption Charge (85% of water use)
Low Strength $2.67 $2.93 2,039 2,178 2,069 1,913 1,841 1,639 1,486 1,214 999 1,055 1,698 1,955 20,086
Schools 2.67 2.93 4,028 5,689 5,390 4,345 3,761 2,369 1,077 1,256 1,293 1,811 4,138 2,751 37,908
Churches 2.67 2.93 280 311 462 367 306 305 276 309 205 191 240 262 3,514
Medium Strength 3.31 3.64 447 592 627 430 557 585 485 498 404 429 502 537 6,093
High Strength 4.56 5.01 517 604 585 452 529 474 447 436 393 384 453 540 5,814-----------------------------------------------------------------------------------------------------------------------------------------------7,311 9,374 9,133 7,507 6,994 5,372 3,771 3,713 3,294 3,870 7,031 6,045 73,415
$20,784 $26,549 $25,892 $21,173 $20,030 $15,614 $12,323 $12,140 $10,756 $12,442 $21,899 $19,216 $218,818
Total Commercial Revenue $28,150 $33,916 $33,259 $28,540 $27,397 $22,980 $20,486 $20,303 $18,919 $20,606 $30,063 $27,380 $311,997
$ / CCF
$ / Acct. / Mo.
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Exhibit 5
Revenues at Present Rates
1-Jan-19 1-Jan-20 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Total
Rates Effective
Summary
Customers
Residential 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605 4,605
Multi-Residential 50 50 50 50 50 50 50 50 50 50 50 50 50
Commercial 73 73 73 73 73 73 73 73 73 73 73 73 73----------------------------------------------------------------------------------------------------------------------------------4,728 4,728 4,728 4,728 4,728 4,728 4,728 4,728 4,728 4,728 4,728 4,728 4,728
Consumption
Residential (85% of WW avg)50,303 50,303 50,303 50,303 50,303 50,303 33,892 33,892 33,892 33,892 33,892 33,892 505,168
Multi-Residential (85% of WW avg)6,160 6,160 6,160 6,160 6,160 6,160 5,366 5,366 5,366 5,366 5,366 5,366 69,159
Commercial (85% of annual use)7,311 9,374 9,133 7,507 6,994 5,372 3,771 3,713 3,294 3,870 7,031 6,045 73,415-----------------------------------------------------------------------------------------------------------------------------------------------63,774 65,837 65,596 63,970 63,457 61,835 43,029 42,971 42,552 43,128 46,289 45,303 647,742
Revenue
Residential $202,969 $202,969 $202,969 $202,969 $202,969 $202,969 $174,733 $174,733 $174,733 $174,733 $174,733 $174,733 $2,266,213
Multi-Residential 24,431 24,431 24,431 24,431 24,431 24,431 24,517 24,517 24,517 24,517 24,517 24,517 293,688
Commercial
Low Strength $21,157 $26,046 $25,359 $21,899 $19,985 $15,726 $12,961 $12,785 $11,959 $13,600 $22,445 $19,199 $223,120
Medium Strength 2,419 2,899 3,015 2,363 2,783 2,876 2,797 2,844 2,502 2,593 2,859 2,986 32,936
High Strength 4,574 4,971 4,885 4,278 4,629 4,378 4,729 4,673 4,458 4,413 4,759 5,195 55,942--------------------------------------------------------------------------------------------------------------------------------------------------------------$255,550 $261,315 $260,658 $255,939 $254,797 $250,380 $219,737 $219,553 $218,169 $219,856 $229,313 $226,630 $2,871,898
FY 2020 Budget $2,868,000
Difference $3,898
Percent 0.1%
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Exhibit 6
Volume Allocation Factor
Billed Billing Total Annual Avg. Daily
Flow Factor Flow at Plant Flow At % of
(CCF) [1]Adj.(CCF)Plant (mgd)Total
Residential 439,192 1.00 439,192 0.90 75.4%
Multi-Residential 67,968 1.00 67,968 0.14 11.7%
Commercial
Low StrengthLow Strength 62,892 1.00 62,892 0.13 10.8%
Medium StrengthMedium Strength 6,230 1.00 6,230 0.01 1.1%
High StrengthHigh Strength 5,945 1.00 5,945 0.01 1.0%0 ----------------------------------------------Total 582,227 582,227 1.19 100.0%
Actual Flows [2]1.08
(VOL)
Notes
[2] - Provided by District
[1] - Res/Multi based on estimated 2021/2022 winter water average calculation (Jan - April avg *
85%); Commercial based on 2018 & 2019 annual average calculation (Jan - Dec avg * 85%)
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Exhibit 7
Customer Allocation Factors
Number of % of Number of Weighting Weighted % of
Bills [1]Total Bills Factor [2]Customer Total
Residential 4,605 97.4%4,605 1.00 4,605 81.6%
Multi-Residential 50 1.1%50 10.74 537 9.5%
Commercial
Low StrengthLow Strength 53 1.1%53 5.35 284 5.0%
Medium StrengthMedium Strength 12 0.3%12 5.25 63 1.1%
High StrengthHigh Strength 8 0.2%8 19.00 152 2.7%-----------------------------------------------------Total 4,728 100.0%4,728 5,641 100.0%
(AC)(WCA)
Notes
[1] - Based on FY 2019 Billing Data
[2] - Developed in the weighted meter exhibit Table 1
Actual Customer Weighted Customer
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Exhibit 8
Strength Allocation Factors
Annual Flow Avg. Factor Calculated % of Avg. Factor Calculated % of
(mgd)(mg/l)[2]Pounds [1]Total (mg/l)[2]Pounds [1]Total
Residential 0.90 220 603,122 72.0%240 657,951 72.4%
Multi-Residential 0.14 220 93,338 11.1%240 101,823 11.2%
Commercial
Low StrengthLow Strength 0.13 220 86,367 10.3%240 94,218 10.4%
Medium StrengthMedium Strength 0.01 460 17,889 2.1%460 17,889 2.0%
High StrengthHigh Strength 0.01 1,000 37,108 4.4%1,000 37,108 4.1%------------------------------------------------------Total 1.19 837,823 100.0%908,989 100.0%
231 907,000 (BOD)250 982,000 (SS)
Notes
[1] - Calculated Pounds = Annual Flow [mgd] * Strength Factor * 8.345 [lbs] * 365 [days]
[2] - Estimated based on District wastewater flow characteristics
Suspended SolidsBiological Oxygen Demand
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Exhibit 9
Revenue Allocation Factor
Projected % of
FY 2021 Total
Residential $2,164,233 78.9%
Multi-Residential 280,472 10.2%
Commercial
Low StrengthLow Strength $213,079 7.8%
Medium StrengthMedium Strength 31,454 1.1%
High StrengthHigh Strength 53,424 1.9%-------------------------Total $2,742,663 100.0%
(RR)
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Development of Equivalent Meter Allocation Factor
Table 1
3/4"1"1 1/2"2"3"4"6"8"10"Total % of Total Factor
Residential 4,605 0 0 0 0 0 0 0 0 4,605 97.4%
Multi-Residential 0 0 0 39 5 6 0 0 0 50 1.1%
Commercial
Low Strength 18 5 12 16 1 0 1 0 0 53 1.1%
Medium Strength 3 0 4 5 0 0 0 0 0 12 0.3%
High Strength 1 0 4 2 0 0 0 0 1 8 0.2%----------------------------------------------------------------------------------------------------Total Meters 4,627 5 20 62 6 6 1 0 1 4,728
District Weighting [2]1.00 2.50 5.00 8.00 15.00 25.00 50.00 80.00 115.00
Residential 4,605 0 0 0 0 0 0 0 0 4,605 81.6%1.00
Multi-Residential 0 0 0 312 75 150 0 0 0 537 9.5%10.74
Commercial
Low Strength 18 13 60 128 15 0 50 0 0 284 5.0%5.35
Medium Strength 3 0 20 40 0 0 0 0 0 63 1.1%5.25
High Strength 1 0 20 16 0 0 0 0 115 152 2.7%19.00--------------------------------------------------------------------------------------------------------------4,627 13 100 496 90 150 50 0 115 5,641
Notes
[1] - Provided by the City
[2] - Based on AWWA 3/4" capacity ratios
[3] - Residential set at 3/4" equivalent
Number of Meters
Equivalent Meters
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Exhibit 10
Net Plant In Service
Operating Bio-oxygen Suspended Actual Customer Revenue Direct
As of Volume Demand Solids Customer Acct/Svcs Related Assignment
07/31/17 (VOL)(BOD)(SS)(AC)(WCA)(RR)(DA)
Collection $15,420,555 $13,107,472 $0 $0 $0 $2,313,083 $0 $0 85.0%VOL 15.0%WCA
Treatment $434,162 $173,665 $130,248 $130,248 $0 $0 $0 $0 40.0%VOL 30.0%BOD 30.0%SS
Lift Station $0 $0 $0 $0 $0 $0 $0 $0 100.0%VOL
Plant Before General Plant $15,854,717 $13,281,137 $130,248 $130,248 $0 $2,313,083 $0 $0
% Plant Before General Plant 100.0%83.8%0.8%0.8%0.0%14.6%0.0%0.0% Factor PBGP
General Plant $0 $0 $0 $0 $0 $0 $0 $0 As Factor PBGP
Total Net Plant In Service $15,854,717 $13,281,137 $130,248 $130,248 $0 $2,313,083 $0 $0
Strength Related Weighted
Basis of Classification
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Exhibit 11.1
Classification of the Revenue Requirement
Operating Bio-oxygen Suspended Actual Customer Revenue Direct
Test Year Volume Demand Solids Customer Acct/Svcs Related Assignment
FY 2021 (VOL)(BOD)(SS)(AC)(WCA)(RR)(DA)
Power Costs $162,015 $162,015 $0 $0 $0 $0 $0 $0 100.0%VOL
Administrative Expenses
Directors Fees $0 $0 $0 $0 $0 $0 $0 $0 100.0%WCA
Travel and Meetings 0 0 0 0 0 0 0 0 100.0%WCA
Conservation and Outreach 0 0 0 0 0 0 0 0 100.0%WCA
General Office Expense 0 0 0 0 0 0 0 0 100.0%WCA
Equipment 23,999 0 0 0 0 23,999 0 0 100.0%WCA
Fees 3,914 0 0 0 0 3,914 0 0 100.0%WCA
Services 51,809 0 0 0 0 51,809 0 0 100.0%WCA
Training 0 0 0 0 0 0 0 0 100.0%WCA
Utilities 0 0 0 0 0 0 0 0 100.0%WCA
Bad Debt Expense 4,300 0 0 0 0 4,300 0 0 100.0%WCA
Interest Expense 0 0 0 0 0 0 0 0 100.0%WCA
Other Employee Benefits 0 0 0 0 0 0 0 0 100.0%WCA
WO Allocation - Sewer 204,204 171,057 1,678 1,678 0 29,792 0 0 As Net Plant In Service------------------------------------------------------------------------------------------------------------------------Total Administrative Expenses $288,226 $171,057 $1,678 $1,678 $0 $113,814 $0 $0
Materials & Maintenance
Fuel & Oil $0 $0 $0 $0 $0 $0 $0 $0 As Net Plant In Service
Meters & Materials 0 0 0 0 0 0 0 0 As Net Plant In Service
Fleet Parts & Equipment 8,320 6,969 68 68 0 1,214 0 0 As Net Plant In Service
Communication Equipment 0 0 0 0 0 0 0 0 As Net Plant In Service
Landscaping Materials 0 0 0 0 0 0 0 0 As Net Plant In Service
Infrastructure Equipment & Supplies 138,216 115,780 1,135 1,135 0 20,165 0 0 As Net Plant In Service
Chemicals 28,496 23,870 234 234 0 4,157 0 0 As Net Plant In Service
Safety Equipment 7,280 6,098 60 60 0 1,062 0 0 As Net Plant In Service
Laboratory Equipment & Supplies 5,824 4,879 48 48 0 850 0 0 As Net Plant In Service
Other Materials & Supplies 104 87 1 1 0 15 0 0 As Net Plant In Service
Building & Grounds Materials 0 0 0 0 0 0 0 0 As Net Plant In Service
Contracted Services 165,152 138,344 1,357 1,357 0 24,094 0 0 As Net Plant In Service
Metro O&M Costs 630,945 309,163 152,058 169,724 0 0 0 0 49.0%VOL 24.1%BOD 26.9%SS
Spring Valley Sewer Charge 185,200 185,200 0 0 0 0 0 0 100.0%VOL
Chula Vista Capacity Fee 0 0 0 0 0 0 0 0 As Net Plant In Service
Metro Capacity Fee 0 0 0 0 0 0 0 0 As Net Plant In Service------------------------------------------------------------------------------------------------------------------------Total Materials & Maintenance $1,169,537 $790,392 $154,961 $172,627 $0 $51,557 $0 $0
Strength Related Weighted for:
Basis of Classification
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Exhibit 11.1
Classification of the Revenue Requirement
Operating Bio-oxygen Suspended Actual Customer Revenue Direct
Test Year Volume Demand Solids Customer Acct/Svcs Related Assignment
FY 2021 (VOL)(BOD)(SS)(AC)(WCA)(RR)(DA)
Strength Related Weighted for:
Basis of Classification
Labor & Benefits
Labor $486,675 $0 $0 $0 $0 $486,675 $0 $0 100.0%WCA
WO Allocation - Sewer 353,496 296,116 2,904 2,904 0 51,572 0 0 As Net Plant In Service
Vacation/Sick/Holidays 48,513 0 0 0 0 48,513 0 0 100.0%WCA
FICA (Soc Sec/Medicare)37,080 0 0 0 0 37,080 0 0 100.0%WCA
Pension 84,048 0 0 0 0 84,048 0 0 100.0%WCA
Health/Dental/Life Insurance 99,487 0 0 0 0 99,487 0 0 100.0%WCA
Worker's Compensation 52,328 0 0 0 0 52,328 0 0 100.0%WCA
Salary Continuation Insurance 1,854 0 0 0 0 1,854 0 0 100.0%WCA
Employee Awards 0 0 0 0 0 0 0 0 100.0%WCA
OPEB 39,000 0 0 0 0 39,000 0 0 100.0%WCA
State Unemployment Insurance 0 0 0 0 0 0 0 0 100.0%WCA
Employee Assistance Program 0 0 0 0 0 0 0 0 100.0%WCA
Employee Programs 0 0 0 0 0 0 0 0 100.0%WCA
Uniforms 0 0 0 0 0 0 0 0 100.0%WCA------------------------------------------------------------------------------------------------------------------------Total Labor & Benefits $1,202,481 $296,116 $2,904 $2,904 $0 $900,557 $0 $0
Total Operations & Maintenance $2,822,259 $1,419,579 $159,542 $177,209 $0 $1,065,928 $0 $0
Taxes / Transfer
General Fund $0 $0 $0 $0 $0 $0 $0 $0 100.0%WCA
Betterment Fund 0 0 0 0 0 0 0 0 100.0%WCA
Replacement Fund 0 0 0 0 0 0 0 0 100.0%WCA
OPEB Fund 41,200 0 0 0 0 41,200 0 0 100.0%WCA------------------------------------------------------------------------------------------------------------------------Total Taxes / Transfer $41,200 $0 $0 $0 $0 $41,200 $0 $0
Rate Funded Capital $0 $0 $0 $0 $0 $0 $0 $0 As Total O&M Expenses
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Exhibit 11.1
Classification of the Revenue Requirement
Operating Bio-oxygen Suspended Actual Customer Revenue Direct
Test Year Volume Demand Solids Customer Acct/Svcs Related Assignment
FY 2021 (VOL)(BOD)(SS)(AC)(WCA)(RR)(DA)
Strength Related Weighted for:
Basis of Classification
Debt Service
Existing Debt $0 $0 $0 $0 $0 $0 $0 $0 100.0%WCA
New Sewer Loan 0 0 0 0 0 0 0 0 100.0%WCA
FY 2020 Issuance 133,400 0 0 0 0 133,400 0 0 100.0%WCA
FY 2022 Issuance 0 0 0 0 0 0 0 0 100.0%WCA------------------------------------------------------------------------------------------------------------------------Total Debt Service $133,400 $0 $0 $0 $0 $133,400 $0 $0
Total Less Replacement Reserves $133,400 $0 $0 $0 $0 $133,400 $0 $0 As Total Debt Service
Net Debt Service $0 $0 $0 $0 $0 $0 $0 $0
To / (From) Reserves
To / (From) Operating Reserves ($172,130)($86,580)($9,731)($10,808)$0 ($65,011)$0 $0 As Total O&M Expenses
To / (From) Replacement Reserves (118,000)(59,353)(6,671)(7,409)0 (44,567)0 0 As Total O&M Expenses
To / (From) Betterment Reserves 288,000 144,862 16,281 18,083 0 108,774 0 0 As Total O&M Expenses
To / (From) Expansion Reserves 55,000 27,665 3,109 3,453 0 20,773 0 0 As Total O&M Expenses------------------------------------------------------------------------------------------------------------------------Total To / (From) Reserves $52,870 $26,593 $2,989 $3,320 $0 $19,968 $0 $0
Total Revenue Requirement $2,916,329 $1,446,173 $162,531 $180,529 $0 $1,127,096 $0 $0
Less: Miscellaneous Revenue
Availability Revenues $51,900 $51,900 $0 $0 $0 $0 $0 $0 100.0%VOL
Sewer Revenue from Shared Facility (SVSD)29,700 14,939 1,679 1,865 0 11,217 0 0 As Total O&M Expenses
Late Fee 22,066 11,099 1,247 1,386 0 8,334 0 0 As Total O&M Expenses
Grants - SDCWA Shared Facil Replcmnt 70,000 70,000 0 0 0 0 0 0 100.0%VOL------------------------------------------------------------------------------------------------Total Other Revenues $173,666 $147,938 $2,926 $3,250 $0 $19,551 $0 $0
Net Revenue Requirement $2,742,663 $1,298,235 $159,605 $177,278 $0 $1,107,545 $0 $0
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Exhibit 12
Allocation of Total Revenue Requirement
FY 2021
Expenses
Volume Related $1,298,235 $979,299 $151,554 $140,235 $13,892 $13,256 (VOL)
Strength Related
Bio-oxygen Demand $159,605 $114,894 $17,781 $16,453 $3,408 $7,069 (BOD)
Suspended Solids 177,278 128,319 19,858 18,375 3,489 7,237 (SS)--------------------------------------------------------------------------------Total Strength Related $336,883 $243,213 $37,639 $34,828 $6,897 $14,306
Customer Related
Actual Customer $0 $0 $0 $0 $0 $0 (AC)
Weighted Customer 1,107,545 904,219 105,443 55,667 12,370 29,846 (WCA)--------------------------------------------------------------------------------Total Customer Related $1,107,545 $904,219 $105,443 $55,667 $12,370 $29,846
Revenue Related $0 $0 $0 $0 $0 $0 (RR)
Direct Assignment $0 $0 $0 $0 $0 $0 (DA)
Total Revenue Requirements $2,742,663 $2,126,730 $294,636 $230,730 $33,159 $57,408
High
Strength
Medium
StrengthLow Strength
Multi-
ResidentialResidential Basis of Allocation
Commercial
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Exhibit 13
Cost of Service Analysis Summary
FY 2021
Revenues at Present Rates $2,742,663 $2,657,785 $31,454 $53,424
Allocated Revenue Requirement $2,742,663 $2,652,096 $33,159 $57,408--------------------------------------------------------Bal. / (Def.) of Funds ($0)$5,688 ($1,705)($3,983)
Required % Change in Rates 0.0%-0.2%5.4%7.5%
Low Strength
Medium
Strength High Strength
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Exhibit 14
Average Unit Costs Summary
Variable Cost - $ / CCF $2.77 $2.75 $2.84 $2.70 $3.08 $4.34
Current Rates (1.1.20)$2.93 $2.93 $2.93 $3.64 $5.01
Fixed Costs - $/Cust/Month $16.35 $16.35 $16.35 $16.35 $16.35 $16.35
Current Rates (1.1.20)$16.38 $16.38 $16.38 $16.38 $16.38
Total Average Cost - $/Cust/Month $40.52 $38.49 $45.72 $94.44 $119.80 $31.47
Alloc RevReq/Consumption $4.80 $4.93 $0.00 $3.67 $37.03 $38.81
Rev Req/Consumption 4.80 5.02 0.00 3.39 34.20 35.84
Basic Data
Annual Flow - 100 CF 571,973 431,319 65,588 62,892 6,230 5,945
Months 1 - 6 263,274 203,351 32,199 22,216 2,855 2,653
Months 7 - 12 308,699 227,968 33,389 40,676 3,375 3,292
Fixed Rev (Months 1 - 6)$554,321 $452,579 $52,762 $27,855 $6,190 $14,935
Variable Rev (Months 1 - 6)$778,938 $595,819 $94,343 $65,093 $10,392 $13,292
Number of Actual Customers 4,728 4,605 50 53 12 8
Number of Equiv. Customers 5,641 4,605 537 284 63 152
Residential
Commercial
High
Strength
Medium
StrengthLow Strength
Multi-
Residential
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Residential - Alt 1
Present
Rates FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Fixed Charge
Monthly System Fee $16.38 $16.13 $17.10 $18.22 $19.15 $20.60
Consumption Charge
Billed @ 85% of WW Avg $2.93 $2.89 $3.06 $3.26 $3.42 $3.59
Proposed
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Multi-Residential - Alt 1
Present
Rates FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Fixed Charge
3/4"$16.38 $16.13 $17.10 $18.22 $19.15 $20.60
1"40.94 40.32 42.74 45.54 47.86 51.49
1 1/2"81.88 80.63 85.48 91.08 95.73 102.97
2"131.00 129.00 136.76 145.72 153.15 164.75
3"245.64 241.89 256.44 273.23 287.18 308.92
4"409.40 403.15 427.40 455.39 478.63 514.87
6"818.79 806.29 854.78 910.77 957.25 1,029.74
8"1,310.08 1,290.08 1,367.67 1,457.24 1,531.63 1,647.60
10"1,883.23 1,854.49 1,966.01 2,094.78 2,201.70 2,368.41
Consumption Charge
Billed @ 85% of WW Avg $2.93 $2.89 $3.06 $3.26 $3.42 $3.59
Proposed
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Commercial - Alt 1
Present
Rates FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Fixed Charge
3/4"$16.38 $16.13 $17.10 $18.22 $19.15 $19.15
1"40.94 40.32 42.74 45.54 47.86 47.86
1 1/2"81.88 80.63 85.48 91.08 95.73 95.73
2"131.00 129.00 136.76 145.72 153.15 153.15
3"245.64 241.89 256.44 273.23 287.18 287.18
4"409.40 403.15 427.40 455.39 478.63 478.63
6"818.79 806.29 854.78 910.77 957.25 957.25
8"1,310.08 1,290.08 1,367.67 1,457.24 1,531.63 1,531.63
10"1,883.23 1,854.49 1,966.01 2,094.78 2,201.70 2,201.70
Consumption Charge (85% of water use)
Low Strength $2.93 $2.89 $3.06 $3.26 $3.42 $3.59
Schools 2.93 2.89 3.06 3.26 3.42 3.59
Churches 2.93 2.89 3.06 3.26 3.42 3.59
Medium Strength 3.64 3.29 3.49 3.71 3.90 4.09
High Strength 5.01 4.63 4.91 5.23 5.48 5.76
Proposed
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