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HomeMy WebLinkAbout02-21-18 F&A Committee Packet 1 OTAY WATER DISTRICT FINANCE AND ADMINISTRATION COMMITTEE MEETING and SPECIAL MEETING OF THE BOARD OF DIRECTORS 2554 SWEETWATER SPRINGS BOULEVARD SPRING VALLEY, CALIFORNIA BOARDROOM WEDNESDAY February 21, 2018 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 TO SPEAK TO THE BOARD ON ANY SUBJECT MATTER WITHIN THE BOARD'S JU- RISDICTION BUT NOT AN ITEM ON TODAY'S AGENDA DISCUSSION ITEMS 3. APPROVE AN AGREEMENT WITH ADP, LLC, FOR SOFTWARE SERVICES RELATED TO PAYROLL AND PERSONNEL MANAGEMENT IN THE AMOUNT OF $18,675 FOR IMPLEMENTATION COSTS AND AN ANNUAL SERVICE FEE OF $58,009 (KOEPPEN) [5 minutes] 4. PRESENT RESULTS OF THE CURRENT SEWER COST OF SERVICE STUDY PREPARED BY HDR ENGINEERING, INC. (KOEPPEN) [10 minutes] 5. FISCAL YEAR 2018 MID-YEAR STRATEGIC PLAN UPDATE (SEGURA) [10 minutes] 6. ADJOURNMENT 2 BOARD MEMBERS ATTENDING: Mark Robak, Chair Mitch Thompson 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 February 16, 2018 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 February 16, 2018. /s/ Susan Cruz, District Secretary STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: March 7, 2018 SUBMITTED BY: Kevin Koeppen, Assistant Chief of Finance PROJECT: DIV. NO. All APPROVED BY: Joseph R. Beachem, Chief Financial Officer Mark Watton, General Manager SUBJECT: Replacement of the District’s Payroll and Timesheet Modules with a Third-party Payroll Solution GENERAL MANAGER’S RECOMMENDATION: That the Board authorize the General Manager to enter into an agreement with ADP, LLC. (ADP), for software services related to payroll and personnel management in the amount of $18,675 for implementation costs and an annual service fee of $58,009. COMMITTEE ACTION: Please see Attachment A. PURPOSE: To authorize the General Manager to enter into service agreement with ADP for software services to support the District’s payroll processing and personnel database. ANALYSIS: Staff routinely examines processes and procedures to determine if there are opportunities to increase their efficiency and effectiveness. Due to the retirement of the District’s payroll technician and to the increasingly complex payroll regulatory 2 environment, staff evaluated the potential benefits and risks of utilizing a third-party payroll provider for its payroll processing. The District currently processes payroll using its ERP system, Eden, and a timesheet system developed and maintained by the District’s IT staff. Finance staff is responsible for ensuring the Eden system tables and calculations comply with all changes in regulatory requirements. Due to the financial risks and cost to administer and stay abreast of payroll regulations, firms have increasingly turned to third-party providers for assistance with their payroll process. The benefits of utilizing a third-party payroll provider include: leveraging those systems and resources for payroll compliance; utilizing their timesheet system; incorporating best management practices and internal controls; and gaining technological capabilities that would not be financially feasible for the District to undertake. Some of the technological capabilities staff observed during the evaluation include: mobile applications, an advanced timekeeping system, integrated open enrollment processing, and a streamlined employee onboarding process. Through efficiencies gained from the utilization of a third-party payroll provider, staff will be able to reduce one full-time equivalent (FTE). When considering the FTE reduction and other miscellaneous cost reductions, staff estimates the District will generate a net annual savings of $50,000. Staff met with multiple national and local payroll providers to evaluate their ability to meet the District’s needs. The vendors staff met with included: ADP, Paychex, Ultipro, Paylocity, and Coastal Payroll Services. During the discovery process Ultipro, Paylocity, and Coastal Payroll Services removed themselves from consideration due to their system’s limitations. Limitations for these providers included the inability to: import hours from an external source into the provider’s timesheet system, meet the District’s general ledger requirements, and/or manage the District’s multiple schedules. The remaining vendors, Paychex and ADP, submitted proposals and presented demonstrations of their solutions to staff. Based on the demonstrations and follow-up investigation, Paychex was not able to meet the District’s needs due to limitations in its timesheet system, concerns about their ability to manage the District’s flex schedules, and lack of workflow. ADP’s technology infrastructure methodology and their practice for internal information security is excellent. ADP’s cloud solution 3 promotes a dedicated, secure, and exclusive framework to support the District’s payroll and other financial management services. The model presented includes employee encryption accessibility, redundant electrical power and cooling throughout their various datacenter locations, redundant firewalls, network protocol security, infrastructure security, business continuity measures, and incident recovery. The implementation process is scheduled to be completed in the first quarter of fiscal year 2019. FISCAL IMPACT: The implementation fee of $18,675 and the annual service fee of $58,009 will be funded by the reduction of one FTE. Staff expects the project will be cost neutral in the year of implementation and generate a net annual savings of approximately $50,000 in subsequent years. The fees are fixed for a period of four (4) years. STRATEGIC GOAL: This item supports the District’s strategic plan objective, Advance Business Processes and Operational Efficiencies through the Implementation of Information Technology. LEGAL IMPACT: None. Attachments: A) Committee Action B) ADP Contract ATTACHMENT A SUBJECT/PROJECT: Replacement of the District’s Payroll and Timesheet Modules with a Third-party Payroll Solution COMMITTEE ACTION: That the Board authorize the General Manager to enter into an agreement with ADP, LLC. (ADP), for software services related to payroll and personnel management in the amount of $18,675 for implementation costs and an annual service fee of $58,009. 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. Investment Summary Quote Number 02-2018-18765.2 Company Information Otay Water District 2545 Sweetwater Springs Blvd Spring Valley, CA 91978 United States 135 Total Employees ADP Sales Associate Brittany Caselli MAS UM OM brittany.caselli@adp.com (619) 688-4736 $18,675.00 Implementation Costs Expiration 2/26/2018 Executive Contact Kevin Koeppen Finance Manager kevin. koeppen@otavwater .aov (619) 670-2250 $58,009.35 Total Annual Investment Sales Order Quote Number 02-2018-18765.2 Company Information Otay Water District 2545 Sweetwater Springs Blvd Spring Valley, CA 91978 United States Processing Fees and Considerations Number of Employees: 135 on Otay Water District @ Per Processing Workforce Now Payroll Solutions • Essential Plus Payroll Employment and Income Verification • Employment Verification ~ Monthly Processing Workforce Now HCM Solutions • Enhanced HR • Benefits Administration • HR Assist Workforce Now Time and Attendance • Enhanced Time • Hosting Services • Enhanced Scheduler • Enhanced Leave Workforce Now Time and Attendance Additional Jurisdiction (if applicable) International Employees Rate (if applicable) ~ Annual Processing Year End Forms, W2s or 1 099s @ Total Annual Investment Workforce Now Services Other Considerations Hardware and Other Fees • Additional Manager Licenses Implementation • Implementation for Workforce Now HCM Solutions Count Min 135 Count Min 135 135 $2,650.00 2+ Count Min 135 Count 2 Base $90.00 Base Base Executive Contact Kevin Koeppen Finance Manager kevin.koeppen(ci)otaywater.ggy (619) 670-2250 Rate $2.25 Rate $9.28 Bi-Weekly $393.75 Monthly $1,252.80 See Below $2,650.00 $13.25 $8.95/month $3.00/month Rate $6.95 Annual $10,237.50 Annual $15,033.60 $31,800.00 Annual $938.25 Total Annual $58,009.35 Rate Setup $1,000.00 $2,000.00 $3,300.00 Sales Order Quote Number 02-2018-18765.2 Company Information Otay Water District 2545 Sweetwater Springs Blvd Spring Valley, CA 91978 United States Implementation • Implementation for Workforce Now Time and Attendance • Implementation for WFN extension to calculate FLSA overtime rates • Client will load hours history themselves ®Total Other Considerations Implementation and Setup Implementation Discount Value Estimated Total Net Implementation Executive Contact Kevin Koeppen Finance Manager kevin. koeppen@otawtater .gov (619) 670-2250 $11,875.00 $1,500.00 N/A Total Setup $51,500.00 ( $32,825.00 ) $18,675.00 Sales Order Quote Number 02-2018-18765.2 Company Information Otay Water District 2545 Sweetwater Springs Blvd Spring Valley, CA 91978 United States Important Project and Billing Information Product Executive Contact Kevin Koeppen Finance Manager kevln.koeppen®otaywater.gov (619) 670-2250 Billing for Payroll Processing Services, HCM and any module bundled into the single per employee per processing fee for payroll, is billed immediately following the client's first payroll processing. The billing count is based on the number of pays submitted during each processing period, therefore total billing may fluctuate. Billing for Enhanced Time will be begin on the date Enhanced Time is available for use by the client in a production environment. The billing counts is based on all non-terminated employees in the Time Module. This count includes practitioners and supervisors. Billing for all modules bundled under HCM Solutions will begin on the date the ADP Product or Service is available for use by the client in a production environment. The billing count is based on all unique lives in the database paid in the previous calendar month. Any non-terminated employees based outside the United States will be billed separately as International Employees. The Enhanced Time pricing is based solely on tracking US employees Only. Extra fees will apply for tracking any lives outside the us. Other Start Date: Payroll:6/22/2018l Time:8/3/2018l HCM:8/17/2018 ADP's Fees for Service will be debited directly out of client's bank account of their choosing seven (7) days from invoice date. Expiration Date: 2/26/2018 Summary Estimated Annual Net Investment: $58,009.35 Total Net Implementation: $18,675.00 The ADP Services listed on this Sales Order and the fees for such services set forth above are not final and remain subject to approval by ADP Finance in all respects. Once final, Client will receive a revised final, executable sales order to be signed by both ADP and Client. Sales Order Quote Number 02-2018-18765.2 Company Information Otay Water District 2545 Sweetwater Springs Blvd Spring Valley, CA 91978 United States Workforce Now Included SeNices Essential Plus Payroll • Tax Filing Service • Payment Services • Reports Library and Custom Report Writer • Wage Garnishment Processing • Group Term Life Auto Calculation • One Delivery Location Enhanced HR • ADP Portal with Customized Content • Paid Time Off (PTO) Accruals Engine • Multiple Language & Currencies • Country Specific Workflows & Processes • Country Specific Custom Fields & Formatting • Employee and Manager Self Service Benefits Administration • Multiple Benefit Plan Types • Flexible Rate Structures (Age Banded & Salary Tiers) • Notifications & Approvals • Invoice Auditing • Annuai1095-C Forms HR Assist • HR Forms Compliance Library and Webinars • Employee Handbook • Labor Law Posters Enhanced Time • Multiple Time Collection Methods • PTO Management & Reporting • Request & Approval Workflows • Scheduling Hosting Services Enhanced Scheduler Enhanced Leave Employment Verification • Commercial Employment and Income Verifications Executive Contact Kevin Koeppen Finance Manager kevin.koeppen@otavwater .gov (619) 670-2250 • Employee and Manager Self Service • Access to Mobile Apps • Employee Discount Program • New Hire Reporting • General Ledger Solution • Online Reports and Pay Statements • Employee Development Tracking • Onboarding • Compliance Reporting • Organization Charting • Policy Acknowledgement • Dependent & Beneficiary Tracking • Employee Open Enrollment • ACA Measurement Dashboard • Evidence of Benefit Offering Screens • Annuai1094-C Filing • Sample Job Description • Employer Helpdesk (proactive outreach) • ACA Support • Rule Based Calculations • Enhanced Accruals 'Engine' • Time Off Request Template • Access to Mobile Apps • Client access to Electronic Reports and Tools Sales Order Quote Number 02-2018-18765.2 Company Information Otay Water District 2545 Sweetwater Springs Blvd Spring Valley, CA 91978 United States Workforce Now Included Services • Social Services Verifications • Workers Compensation Verifications Executive Contact Kevin Koeppen Finance Manager kevin.koenpen®otaywater .qov (619) 670-2250 • Immigration Verifications Thank you for your consideration ~ Major Accounts Services Amor~ hufl'.lJ'ore>ource. Master Services Agreement ADP, LLC: (referred to herein as "ADP") Client: (referred to herein as "Client") One ADP Boulevard Roseland, New Jersey 07068 United States Otay Water District 01-12-2018 2545 Sweetwater Springs Blvd (Effective Date) Spring Valley, CA 91978, United States Attention Kevin Koeppen ADP and Client agree that ADP shall provide Client with the following services in accordance with the terms and subject to the conditions set forth in this Major Accounts Services Master Services Agreement (the "Agreement") ANNEXA: GENERAL TERMS AND CONDITIONS ANNEX B: PAYROLL PROCESSING & TAX FILING; EMPLOYMENT VERIFICATION SERVICES ANNEX C: [TIME AND ATTENDANCE SERVICES ft\NNEX D: HR, BENEFITS AND TALENT MANAGEMENT SERVICES ~NNEX L: HR ASSIST SERVICES BY SIGNING BELOW, CLIENT ACKNOWLEDGES THAT THEY HAVE REVIEWED THE ENTIRE AGREEMENT INCLUDING THETERMS AND CONDITIONS IN EACH ANNEX CORRESPONDING TO SERVICES PURCHASED PURSUANT TO THE SALES ORDER. This Agreement includes the Annexes related to the services selected by Client. Each Annex listed above is attached hereto and is incorporated into this Agreement in full by this reference as if set forth in this Agreement in full. ADP, LLC CLIENT (Signature of Authorized Representative) (Signature of Authorized Representative) (Name -Please Print) (Name -Please Print) (Title) (Date) (Title) (Date) ADP Proprietary and Confidential 02-2018-18765.2 ADP Major Account Services Version 3 (07012016) Cover-2 Major Accounts Services I Annex A General Terms and Conditions 1 Definitions. 1.1 "ADP" has the meaning set forth on the cover page. A more human resource: 1.2 "ADP Application Programs" means the computer software programs and related Documentation, including any updates, modifications or enhancements thereto, that are either delivered or made accessible to Client through a hosted environment by ADP in connection with the Services. 1.3 "ADP Workforce Now" means ADP's web-based portal which provides a single point of access to ADP online solutions and employee-facing websites and resources related to payroll, HR, benefits, talent, and time and attendance. A general description of the Services can be found at www.productdescription.majoraccounts.adp.com (which may be modified from time to time provided, however, that any such modifications will not have a material adverse impact on any of the Services Client is receiving). 1.4 "Agreement" means this Major Accounts Services-Master Services Agreement, consisting of the signature pages, the General Terms and Conditions, all exhibits, annexes, addendum, appendices and schedules, and each Amendment, if any. 1.5 "Affiliate" means any individual, corporation or partnership or any other entity or organization (a "person") that controls, is controlled by or is under common control with Client. For purposes of the preceding definition, "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through ownership of voting securities or by contract or otherwise. 1.6 "API" means ADP approved application programming interface(s) that support point to point interaction of different systems. 1.7 "Approved Country" means each country in which, subject to the terms of this Agreement, Client is authorized to use or receive the Services. The Approved Country for the Services is the United States. 1.8 "Access Country" means each country in which, subject to the terms of this Agreement, Client is authorized to use or access the HR and/or Talent modules of ADP Workforce Now (but specifically excluding document cloud services and any other modules/tools that ADP, in its sole discretion, determines shall not be accessible to Client employees located outside the United States) and as approved by ADP. A list of Access Countries for the applicable Services is found at found at www.oroductdescription.maloraccounts.adp.com. 1.9 "Business Day" means any day, except a Saturday, Sunday or a day on which ADP's bank is not open for business in the applicable jurisdiction where services are provided by ADP. 1.10 "Client" has the meaning set forth on the cover page. 1.11 "Client Content" means all information and materials provided by Client, its agents or employees, regardless of form, to ADP under this Agreement. 1.12 "Client Group" means Client and Client's Affiliates means Client and Client's Affiliates who are receiving Services under this Agreement pursuant to a Sales Order. 1.13 "Client Infringement Event" means (i) any change, or enhancement in the Services made by Client or any third party on behalf of Client other than at the direction of, or as approved by, ADP, (ii) Client's use of the Services except as contemplated by this Agreement, or (ii i) to the extent ADP Application Programs include computer software programs, Client's use of other than the most current release or version of such computer software programs included in the ADP Application Programs, or Client's failure to use corrections or enhancements to such computer software programs included in the ADP Application Programs, in each case provided by ADP to Client at no charge, that results in a claim or action for infringement that could have been avoided by use of such current release or version, or by such corrections or enhancements. 1.14 "Confidential Information" means all information of a confidential or proprietary nature, including pricing and pricing related information and all Personal Information, provided by the disclosing party to the receiving party under this Agreement but does not include (i) information that is already known by the receiving party, (ii) information that becomes generally available to the public other than as a result of disclosure by the receiving party in violation of this Agreement, and (iii) information that becomes known to the receiving party from a source other than the disclosing party on a non-confidential basis. 1.15 "Documentation" means all manuals, tutorials and related materials that may be provided or made available to Client by ADP in connection with the Services. 1.16 "General Terms and Conditions" means the terms and conditions contained in this Annex A. 1.17 "Gross Negligence" has the meaning set forth in Section 7.3.1. 1.18 "Improvements" has the meaning set forth in Section 5.4 1.19 "Incident" means a security breach (as defined in any applicable law) or any other event that compromises the security, confidentiality or integrity of Client's Personal Information. 1.20 "lndemnitees" has the meaning set forth in Section 6.3 1.21 "Indemnitor" has the meaning set forth in Section 6.3. 1.22 "Intellectual Property Rights" means all rights, title and interest to or in patent, copyright, trademark, service mark, trade secret, business or trade name, know-how and rights of a similar or corresponding character. 1.23 "Internal Business Purposes" means the usage of the Services solely by the Client Group for its own internal business purposes, without the right to provide service bureau or other data processing services, or otherwise share or distribute the Services, to any party outside the Client Group, unless expressly contemplated by this Agreement. 1.24 "NACHA" means the National Automated Clearing House Association. 1.25 ''OFAC" means the Office of Foreign Assets Control. 1.26 "Payee" means any intended recipient of payments under the Payment Services and may include Client's employees, taxing authorities, governmental agencies, suppliers. benefit carriers and/or other third parties; provided that in the case of ADP Wage Payment Services, Payee shall be limited to Client's employees and independent contractors. 1.27 "Payment Services" means any Services that involve electronic or check payments being made by ADP to third parties on Client's behalf and at its direction. ADP Proprietary and Confidential Version 4 (10202017) ADP Major Accounts Services A-1 Major Accounts Services I Annex A General Terms and Conditions A more human resourc~. 1.28 "Personal Information" means information relating to an identified or identifiable natural person. An identifiable natural person is one who can be identified, directly or indirectly, in particular by reference to an identification number or to one or more factors specific to such person's physical, physiological, mental, economic, cultural or social identity. 1.29 "Price Agreement" means a supplemental agreement between the parties that addresses future price increase rates on certain Services over a specific period of time. 1.30 "Sales Order(s)" means the document(s) between the parties that lists the specific Services purchased by Client Group from ADP. 1.31 "Services" means the services (including implementation services related thereto) listed in any Sales Order, and such other services as the parties may agree to be performed from time to time. 1.32 "SOC 1" means any routine Service Organization Control 1 reports. 1.33 "Termination Event" means with respect to any party, the occurrence of any of the following: (i) under the applicable bankruptcy laws or similar law regarding insolvency or relief for debtors, (A) a trustee, receiver, custodian or similar officer is appointed over a party's business or property, (B) a party seeks to liquidate, wind-up, dissolve, reorganize or otherwise obtain relief from its creditors, or (C) an involuntary proceeding is commenced against a party and the proceeding is not stayed, discharged or dismissed within thirty (30) days of its commencement, or (ii) a party's Standard and Poor's issuer credit rating falls to or below BB. 1.34 "User" means any single natural person who, subject to the terms of this Agreement, is authorized by Client to use, access or receive the Services. 2 Provision and Use of Services 2.1 Provision of Services. ADP, or one of its Affiliates, will provide the Services to Client in accordance with the terms of this Agreement and any applicable Sales Order(s) ADP will provide the Services in a good, diligent and professional manner in accordance with industry standards, utilizing personnel with a level of skill commensurate with the Services to be performed. ADP's performance of the Services (including any applicable implementation activities) is dependent upon the timely completion of Client's responsibilities and obligations under this Agreement. Without limitation of the foregoing, Client will timely provide the Client Content necessary for ADP to provide the Services. 2.2 Cooperation. ADP and Client will work together to implement the Services. Client will cooperate with ADP and execute and deliver all documents, forms, or instruments necessary for ADP to implement and render the Services. Client will provide ADP with all reasonable and necessary Client Content in the format requested by ADP, and will otherwise provide all reasonable assistance required of Client in order for ADP to implement the Services. 2.3 Use of Services. Client will use the Services in accordance with the terms of this Agreement and solely for its own Internal Business Purposes in the Approved Country and the Access Countries. Client will be responsible for the use of the Services by the Client Group and the Users in accordance with the terms of this Agreement. Client is responsible for the accuracy and completeness of the Client Content provided to ADP. 2.4 Errors. Client will promptly review all documents and reports produced by ADP and provided or made available to Client in connection with the Services and promptly notify ADP of any error, omission, or discrepancy with Client's records. ADP will promptly correct such error, omission or discrepancy and, if such error, omission or discrepancy was caused by ADP, then such correction will be done at no additional charge to Client. 2.5 Records. Without prejudice to ADP's obligation to retain the data necessary for the provision of the Services, ADP does not serve as Client's record keeper and Client will be responsible for retaining copies of all documentation received from and Client Content provided to ADP in connection with the Services to the extent required by Client 3 Compliance. 3.1. Applicable Laws. Each party will comply with applicable laws and regulations that affect its business generally, including any applicable anti-bribery, export control and data protection laws 3.2. Design of the Services. ADP will design the Services, including the functions and processes applicable to the performance of the Services, to assist the Client in complying with its legal and regulatory requirements applicable to the Services, and ADP will be responsible for the accuracy of such design. Client and not ADP will be responsible for (i) how it uses the Services to comply with its legal and regulatory requirements and (ii) the consequences of any instructions that it gives or fails to give to ADP, including as part of the implementation of the Services, provided ADP follows such instructions. Services do not include any legal, financial, regulatory, benefits, accounting or tax advice. 3.3. Online Statements. If Client instructs ADP to provide online pay statements, Forms W2, Forms 1099 or Forms 1095-C, as applicable, without physical copies thereof, Client will be exclusively responsible for determining if and to what extent Client's use of online pay statements, Forms W2, Forms 1099 or Forms 1095-C, as applicable, satisfies Client's obligations under applicable laws and the consequences resulting from such determinations. 3.4. Data Protection Laws. Client represents that Personal Information transferred by Client or at Client's direction to ADP has been collected in accordance with applicable privacy laws, and ADP agrees that it shall only process the Personal Information as needed to perform the Services, or as required or permitted by law. ADP Proprietary and Confidential Version 4 (10202017) ADP Major Accounts Services A-2 Major Accou nts Services I Annex A General Terms and Conditions 4 Confidentiality A n1ore hum~n resour~e; 4.1 General. All Confidential Information disclosed under this Agreement will remain the exclusive and confidential property of the disclosing party. The receiving party will not disclose to any third party the Confidential Information of the disclosing party and will use at least the same degree of care, discretion and diligence in protecting the Confidential Information of the disclosing party as it uses with respect to its own confidential information. The receiving party will limit access to Confidential Information to its employees with a need to know the Confidentiallnfon11ation and will instruct those employees to keep such information confidential. ADP may disclose Client's Confidential Information on a need to know basis to (i) ADP's subcontractors who are performing the Services, provided that ADP shall remain liable for any unauthorized disclosure of Client's Confidential Information by those subcontractors, (ii) employees of ADP 's Affiliates, provided such employees are instructed to keep the information confidential as set forth in this Agreement and (iii) social security agencies, tax authorities and similar third parties, to the extent strictly necessary to perform the Services. ADP may use Client's and its employees' and other Services recipients' information in an aggregated, anonymized form, such that neither Client nor such person may be identified, and Client will have no ownership interest in such aggregated, anonymized data. Client authorizes ADP to release employee-related data, and such other data as required to perform the Services, to third party vendors of Client as designated by Client from time to time. Notwithstanding the foregoing, the receiving party may disclose Confidential information (X) to the extent necessary to comply with any law, rule, regulation or ruling applicable to it, (y) as appropriate to respond to any summons or subpoena or in connection with any litigation and (z) to the extent necessary to enforce its rights under this Agreement. 4.2 Return or Destruction. Upon the request of the disclosing party or upon the expiration or earlier termination of this Agreement, and to the extent feasible, the receiving party will return or destroy all Confidential information of the disclosing party in the possession of the receiving party, provided that each party may maintain a copy if required to meet its legal or regulatory obligations and may maintain archival copies stored in accordance with regular computer back-up operations. To the extent that any portion of Confidential information of a disclosing party remains in the possession of the receiving party, such Confidential information shall remain subject to the generally applicable statutory requirements and the confidentiality protections contained in Section 4.1. 4.3 Transfer. The Services may be performed by ADP Affiliates or subcontractors located in other countries, and ADP may transfer or permit access to Client's Confidential information, including employees' Personal Information, for the purposes of performing the Services outside of Canada and the United States of America. As a result, Client's employees' Personal Information may be subject to the laws of such jurisdictions and may be accessible to the courts and law enforcement authorities of those jurisdictions. Notwithstanding the foregoing, ADP will remain responsible for any unauthorized disclosure or access of Client's employees' Persona/Information by any ADP Affiliate or subcontractor in the performance of any such Services. 5 INTELLECTUAL PROPERTY 5.1 Client IP Rights. Except for the rights expressly granted to ADP in this Agreement, all rights, title and interests in and to Client Content, including all intellectual Property Rights inherent therein and pertaining thereto, are owned exclusively by Client or its licensors. Client hereby grants to ADP for the term of this Agreement a non-exclusive, worldwide, non- transferable, royalty-free license to use, edit, modify, adapt, translate, exhibit, publish, reproduce, copy and display the Client Content for the sole purpose of performing the Services; provided Client has the right to pre-approve the use by ADP of any Client trademarks or service marks. 5.2 ADP IP Rights. Except for the rights expressly granted to Client in this Agreement, all rights, title and interest in and to the Services, including all Intellectual Property Rights inherent therein and pertaining thereto, are owned exclusively by ADP or its licensors. ADP grants to Client for the term of this Agreement ·a personal, non-exclusive, non-transferable, royalty-free license to use and access the ADP Application Programs solely for the Internal Business Purposes in the Approved Countries and the Access Countries. The ADP Application Programs do not include any Client-specific customizations unless otherwise agreed in writing by the parties. Client will not obscure, alter or remove any copyright, trademark, service mark or proprietary rights notices on any materials provided by ADP in connection with the Services, and will not copy, decompile, recompile, disassemble, reverse engineer, or make or distribute any other form of, or any derivative work from, such ADP materials. 5.3 Ownership of Reports. Client will retain ownership of the content of reports and other materials that include Client Content produced and delivered by ADP as a part of the Services, provided that ADP will be the owner of the format of such reports To the extent any such reports or other materials incorporate any ADP proprietary information, ADP (i) retains sole ownership of such proprietary information and (ii) provides the Client a fully paid up, irrevocable, perpetual, royalty-free license to access and use same for its Internal Business Purposes without the right to create derivative works (other than derivative works to be used solely for its Internal Business Purposes) or to further distribute any of the foregoing rights outside the Client Group. 5.4 Improvements. ADP will make available to Client, at no additional cost, software improvements, enhancements, or updates to any ADP Application Programs that are included in the Services (collectively "Improvements") if and as they are made generally available by ADP at no additional cost to ADP's other clients using the same ADP Application Programs as Client and receiving the same Services as Client. All Improvements provided under this Section 5.4 shall be considered part of the ADP Application Programs ADP Proprietary and Confidential Version 4 ( 102020 17) ADP Major Accounts Services A-3 Major Accounts Services I Annex A General Terms and Conditions 6 Indemnities A more hum~n resource, 6.1 ADP Indemnity. Subject to the remainder of this Section 6.1, and Section 6.3 and 7, ADP shall defend Client in any suit or cause of action, and indemnify and hold Client harmless against any damages payable to any third party in any such suit or cause of action, alleging that the Services or ADP Application Programs, as provided by ADP and used in accordance with the terms of this Agreement, infringe upon any Intellectual Property Rights of a third party in an Approved Country. The foregoing infringement indemnity will not apply and ADP will not be liable for any damages assessed in any cause of action to the extent resulting from a Client Infringement Event or ADP's use of Client Content as contemplated by this Agreement. If any Service is held or believed to infringe on any third-party's Intellectual Property Rights, ADP may, in its sole discretion, (i) modify the Service to be non-infringing, (ii) obtain a license to continue using such Service, or (iii) if neither (i) nor (ii) are practical, terminate this Agreement as to the infringing Service. 6.2 Client Indemnity. Subject to Sections 6.3 and 7, Client will defend ADP against any third party claims and will indemnify and hold ADP harmless from any resulting damage awards or settlement amounts in any cause of action to the extent such cause of action is based on the occurrence of a Client Infringement Event or ADP's use of Client Content as contemplated by this Agreement. 6.3 Indemnity Conditions. The indemnities set forth in this Agreement are conditioned on the following: (i) the party claiming indemnification (the "Indemnitee") shall promptly notify the indemnifying party (the "Indemnitor") of any matters in respect of which it seeks to be indemnified, and shall give the Indemnitor full cooperation and opportunity to control the response thereto and the defense thereof, including without limitation any settlement thereof, (ii) the Indemnitor shall have no obligation for any claim under this Agreement if the Indemnitee makes any admission, settlement or other communication regarding such claim without the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld, and (iii) the Indemnitee's failure to promptly give notice to the Indemnitor shall affect the Indemnitor's obligation to indemnify the Indemnitee only to the extent the Indemnitor's rights are materially prejudiced by such failure. The Indemnitee may participate, at its own expense, in such defense and in any settlement discussions directly or through counsel of its choice. 7 Limit on Liability 7.1 Ordinary Cap. Notwithstanding anything to the contrary in this Agreement and subject to the remainder of this Section 7, neither party's aggregate limit on monetary damages in any calendar year shall exceed an amount equal to six (6) times the average ongoing monthly Services fees paid or payable to ADP by Client during such calendar year (the "Ordinary Cap"). ADP will issue Client a credit(s) equal to the applicable amount and any such credit(s) will be applied against subsequent fees owed by Client. 7.2 Extraordinary Cap. As an exception to Section 7.1 , if damages (monetary or otherwise) arise from a breach of Section 4.1 (Confidentiality) or Section 9.3 (Data Security), the Ordinary Cap will be increased by an additional six (6) times the average ongoing monthly Service fees paid or payable to ADP by Client during such calendar year (the "Extraordinary Cap"). For the avoidance of doubt, in no case shall either party's aggregate limit on monetary damages in any calendar year under this Agreement exceed twelve (12) times the average monthly ongoing Service fees paid or payable to ADP by Client during such calendar year. 7.3 Matters not Subject to Either Cap. The limitations of liability set forth in Sections 7.1 and 7.2 shall not apply to: 7.3.1 Either party's Gross Negligence, or willful, criminal or fraudulent misconduct; for the purposes of this Agreement, "Gross Negligence" shall be defined as: (1) willful, wanton, careless or reckless conduct, misconduct, failures, omissions, or disregard of the duty of care towards others of a risk known or so obvious that the actor must be taken to have been aware of it, and with an intent to injure or so great as to make it highly probable that harm would follow and/or (2) failure to use even the slightest amount of care, or conduct so reckless, as to demonstrate a substantial lack of concern fot the safety of others. For the avoidance of doubt, Gross Negligence must be more than any mere mistake resulting from inexperience, excitement, or confusion, and more than mere thoughtlessness or inadvertence or simple inattention; 7.3.2 The infringement indemnity set forth in Sections 6.1 and 6.2; 7.3.3 Client's obligations to pay the fees for Services; 7.3.4 ADP's obligations to provide credit monitoring and notifications as set forth in Section 10.2; 7.3.5 Client's funding obligations in connection with the Payment Services; 7.3.6 ADP's Joss or misdirection of Client funds in possession or control of ADP due to ADP's error or omission; 7.3.7 In connection with the Employment Tax Services as provided in Annex B, (a) interest charges imposed by an applicable tax authority on Client for the failure by ADP to pay funds to the extent and for the period that such funds were held by ADP and (b) all tax penalties resulting from ADP's error or omission in the performance of such Service. The provisions of this (iv) shall only apply if (x) Client permits ADP to act on Client's behalf in any communications and negotiations with the applicable taxing authority that is seeking to impose any such penalties or interest and (y) Client assists ADP as reasonably required by ADP. 7.3.8 Client's use or access of the Services and/or ADP Application Programs outside of the Approved Countries and/or Access Countries. 7.4 Mitigation of Damages. ADP and Client will each use reasonable efforts to mitigate any potential damages or other adverse consequences arising from or relating to the Services. 7.5 No Consequential Damages. N01WITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT AND ONLY TO THE EXTENT PERMITTED BY APPLICABLE LAW, NONE OF ADP, CLIENT OR ANY BANK WILL BE RESPONSIBLE FOR SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR OTHER SIMILAR DAMAGES (INCLUDING DAMAGES FOR LOSS OF BUSINESS OR PROFITS, BUSINESS INTERRUPTIONS OR HARM TO REPUTATION) THAT ANY OTHER PARTY OR ITS RESPECTIVE AFFILIATES MAY INCUR OR EXPERIENCE IN ADP Proprietary and Confidential Version 4 (10202017) ADP Major Accounts Services A-4 Major Accounts Services I Annex A General Terms and Conditions A more hum~n resource. CONNECTION WITH THIS AGREEMENT OR THE SERVICES, HOWEVER CAUSED AND UNDER WHATEVER THEORY OF LIABILITY, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. The foregoing exclusion shall not apply to claims for consequential damages arising from ADP's or Client's (i) willful, criminal or fraudulent misconduct, or (ii) breach or breaches of Section 4.1 or Section 9.3 under this Agreement; provided however, that any consequential damages recovered by Client or ADP in a calendar year for claims pursuant to Section 7.5(ii) will be subject to the Extraordinary Cap set forth in Section 7.2 above. 8 WARRANTIES AND DISCLAIMER 8.1 Warranties. Each party warrants that (i) it has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby and (ii) this Agreement has been duly and validly executed and delivered and constitutes the valid and binding agreement of the parties, enforceable in accordance with its terms. 8.2 DISCLAIMER. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, ALL SERVICES, ADP APPLICATION PROGRAMS AND EQUIPMENT PROVIDED BY ADP OR ITS SUPPLIERS ARE PROVIDED "AS IS" AND ADP AND ITS LICENSORS AND SUPPLIERS EXPRESSLY DISCLAIM ANY WARRANTY, EITHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, COMPLETENESS, CURRENTNESS, NON-INFRINGEMENT, NON-INTERRUPTION OF USE, AND FREEDOM FROM PROGRAM ERRORS, VIRUSES OR ANY OTHER MALICIOUS CODE, WITH RESPECT TO THE SERVICES, THE ADP APPLICATION PROGRAMS, ANY CUSTOM PROGRAMS CREATED BY ADP OR ANY THIRD- PARTY SOFTWARE DELIVERED BY ADP AND RESULTS OBTAINED THROUGH THE USE THEREOF. 9 SECURITY AND CONTROLS 9.1 Service Organization Control Reports. Following completion of implementation of any applicable Services, ADP will, at Client's request and at no charge, provide Client with copies of any routine Service Organization Control 1 reports ("SOC 1 Reports") (or any successor reports thereto) directly related to the core ADP Products utilized to provide the Services provided hereunder for Client and already released to ADP by the public accounting firm producing the report. SOC 1 Reports are ADP Confidential Information and Client will not distribute or allow any third party (other than its independent auditors) to use any such report without the prior written consent of ADP. Client will instruct its independent auditors or other approved third parties to keep such report confidential and Client will remain liable for any unauthorized disclosure of such report by its independent auditors or other approved third parties. 9.2 Business Continuity; Disaster Recovery. ADP has established and will maintain a commercially reasonable business continuity and disaster recovery plan and will follow such plan. 9.3 Data Security. ADP has established and will maintain an information security program containing appropriate administrative, technical and physical measures to protect Client data (including any Personal Information therein) against accidental or unlawful destruction, alteration, unauthorized disclosure or access consistent with applicable laws . In the event ADP suspects any unauthorized access to, or use of, the Services, ADP may suspend access to the Services to the extent ADP deems necessary to preserve the security of the Client's data. 10 DATA SECURITY INCIDENT 10.1 Notification. If ADP becomes aware of a security breach (as defined in any applicable law) or any other event that compromises the security, confidentiality or integrity of Client's Personal Information (an "Incident"), ADP will take appropriate actions to contain, investigate and mitigate the Incident. ADP shall notify Client of an Incident as soon as reasonably possible. 10.2 Other ADP Obligations. In the event that an Incident is the result of the failure of ADP to comply with the terms of this Agreement, ADP shall, to the extent legally required or otherwise necessary to notify the individuals of potential harm, bear the actual, reasonable costs of notifying affected individuals. ADP and Client shall mutually agree on the content and timing of any such notifications, in good faith and as needed to meet applicable legal requirements. In addition, where notifications are required and where such monitoring is practicable and customary, ADP shall also bear the cost of one year of credit monitoring to affected individuals in applicable jurisdictions. 11 PAYMENT TERMS 11.1 Fees and Fee Adjustments. Client will pay to ADP the fees and other charges for the Services as set forth in the Sales Order. Unless there is a Price Agreement in effect, the fees set forth in the Sales Order will remain fixed during the first six (6) months following the Effective Date and thereafter, ADP may modify the fees on an annual basis upon thirty (30) days' prior written notice to Client. The fees presented in the Sales Order were calculated based upon particular assumptions relative to Client requirements (including funding requirements), specifications, volumes and quantities as reflected in the applicable Sales Order and related documentation, and if Client's actual requirements vary from what is stated, ADP may adjust the fees based on such changes. The fees do not include any customizations to any Service. ADP Proprietary and Confidential Version 4 (10202017) ADP Major Accounts Services A-5 Major Accounts Services I Annex A General Terms and Conditions A more human r"source: 11.2 Additional Services and Charges. If Client requests additional services offered by ADP not included in this Agreement, and ADP agrees to provide such services: (i) those services and related fees will be included in a separate Sales Order; (ii) any Services provided to Client but not included in a Sales Order will be provided subject to the terms of this Agreement and charged at the applicable rates as they occur; and (iii) those services will be considered to be "Services" for purposes of this Agreement. Additional charges may be assessed Client in relation to the performance of the Services in certain circumstances, including without limitation, late funding, an insufficient funds notification and emergency payment requests from Client 11.3 Fees for Implementation Services. Implementation fees are due and payable by Client upon the go-live date for such Services. However, if this Agreement or any Service are terminated after implementation services have started but before the go-live date, the greater of the following amounts shall be immediately due and payable by Client (i) implementation fees for implementation services performed up to the date of termination; or (ii) 30% of the total Implementation Fees set out in the Sales Order. 11.4 Invoicing. ADP will notify Client of all applicable Services fees payable by Client by way of invoice or other method (i.e. ADP's on-line reporting tool). Client will pay the amount on each invoice or such other similar document in full within seven (7) days of notification via the agreed to method of payment. All amounts not paid when due are subject to a late payment charge of one and one-half percent (1'Y>%) per month (not to exceed the maximum allowed by applicable law) of the past due amount from the due date until the date paid. 11.5 Currency. Client shall pay the fees in US dollars. 11.6 Taxes. Unless Client provides ADP a valid tax exemption or direct pay certificate, Client will pay directly, or will pay to ADP, an amount equal to all applicable taxes or similar fees levied or based on the Agreement or the Services, exclusive of taxes based on ADP's net income. 11.7 Postage, Shipping Travel and out-of-pocket expenses. ADP will invoice Client for postage charges, delivery charges, other third party charges, and reasonable travel and out-of-pocket expenses as necessary to provide the Services. 11.8 Funding Requirements and Disbursement Disclosures. With respect to Payment Services to be deducted by ACHor Pre-Authorized Debit, Client must have sufficient good funds for payment of the payroll obligations, tax filing obligations, wage garnishment deduction obligations, service fees (as applicable), expenses, and any other applicable charges, to be direct debited from Client's designated account no later than one (1) banking days prior to the pay date for the applicable payroll (in the case of payroll processing services), or as otherwise agreed by the parties. For reverse wire clients, funds must be available (a) one (1) banking day prior to the pay date for the applicable payroll (in the case of the ADP Employment Tax Services) and (b) two (2) banking days prior to the pay date for all other Payment Services, or as otherwise agreed by the parties. In consideration for the additional costs incurred by ADP in providing wire transfer service, Client agrees to pay a reasonable fee (currently $10.00) for each wire transfer. Notwithstanding the foregoing, ADP reserves the right to modify the aforementioned deadlines at any time and will communicate any such modifications to Client. 11.9 Change Control. In the event either party requests a change in the scope of Services (including implementation services) (each a "Change Control Item"), the parties shall address such change request via ADP's change control process. Change Control Items and the cost associated with such changes (if any) to the Services shall be mutually agreed to by the parties, with the exceptions of Change Control Items that are required to be made by law or regulation applicable to the Services or to the duration of implementation services, which ADP will notify Client of prior to making the change. The current standard hourly rate for a Change Control Item $150.00 per hour; provided, however, that such rate may be increased by ADP if such Change Control Item (i) entails significant modification of available resources, (ii) impacts existing change control efforts for other ADP clients, or (iii) occurs during high-volume periods. ADP may modify the standard hourly rate for a Change Control Item from time to time. 12 Term; Termination; Suspension 12.1 Term; Termination for Convenience This Agreement will commence on the Effective Date and remain in effect until terminated by either party in accordance with the terms hereof. Subject to the terms of any Price Agreement, either party may terminate this Agreement or any Service upon ninety (90) days' prior written notice to the other party. In the event Client does not provide ADP with the proper notice as set forth in the previous sentence (or as set forth in any Annex herein), Client shall pay ADP for any fees for Services that would have been incurred by Client during such notice period (calculated based on an average of the prior six months of invoices for such terminated Services, or shorter period of time if there has been less than six months of invoices). 12.2 Termination for Cause. Either party may terminate this Agreement for the other's material breach of this Agreement if such breach is not cured within sixty (60) days following notice thereof or in the event either party is the subject of a Termination Event. In addition. ADP may terminate this Agreement in the event Client fails to timely pay fees for Services performed within 10 days following notice that such fees are past due. ADP may also terminate this Agreement or the Services immediately on written notice to Client if the provision of Service to Client causes or will cause any affiliate or subsidiary of ADP to be in violation of any laws, rules or regulations applicable to such affiliate or subsidiary. Notwithstanding anything to the contrary in this Agreement, email will be considered adequate notification for the purposes of this Section 12. 12.3 Suspension. Without limiting the foregoing, the parties agree that Payment Services involve credit risk to ADP. Payment Services may be suspended by ADP (A) immediately if: (i) Client has failed to remit sufficient, good and available funds within the deadline and via the method of delivery agreed upon as it relates to the applicable Payment Services; or (ii) Client breaches any rules promulgated by NACHA as it relates to ADP conducting electronic payment transactions on behalf of Client, and (B) with 24 hour notice if: (i) a bank notifies ADP that it is no longer willing to originate debits from Client's ADP Proprietary and Confidential Version 4 (10202017) ADP Major Accounts Services A-6 Major Accounts Services I Annex A General Terms and Conditions A more human resource. account(s) or credits for Client's behalf for any reason or (ii) the authorization to debit Client's account is terminated or ADP reasonably believes that there is or has been fraudulent activity on the account. If the Payment Services are terminated or suspended pursuant to Sections 12.2 or 12.3, Client acknowledges that ADP shall be entitled to allocate any funds in ADP's possession that have been previously remitted or otherwise made available by Client to ADP relative to the Payment Services in such priorities as ADP may determine appropriate, including reimbursing ADP for payments made by ADP on Client's behalf to a third party. If the Payment Services are terminated by ADP, Client understands that it will (x) immediately become solely responsible for all of Client's third party payment obligations covered by the Payment Services then or thereafter due (including, without limitation, for ADP Employment Tax Services any and all penalties and interest accruing after the date of such termination, other than penalties and interest for which ADP is responsible under Section 7.3.7), and (y) reimburse ADP for all payments properly made by ADP on behalf of Client to any payee, which have not been paid or reimbursed by Client. If the Payment Services remain suspended for thirty (30) days, the Payment Services will be terminated on the 31st day following suspension. 12.4 Post Termination. At any time prior to the actual termination date, Client may download Client's information or reports available to it in conjunction with all of the Services provided to Client by ADP. Upon termination of this Agreement, Client may order from ADP any data extraction offered by ADP, at the then prevailing hourly time and materials rate. 13 Reserved. 14 Additional Terms. In addition to the terms set forth in any subsequent Annexes attached hereto, the following terms shall apply. 14.1 ESS & MSS Technology. Employee self-service (ESS) and Manager self-service (MSS) functionality provides all Client Users (practitioners, managers and employees) 24x7 online access to ADP Application Programs. The following additional terms apply to the ESS & MSS Technology: 14.1.1 Client acknowledges that Client's employees or participants may input information into the self-service portions of the ADP Application Programs. ADP shall have no responsibility to verify, nor does ADP review the accuracy or completeness of the information provided by Client's employees or participants to ADP using any self-service features. ADP shall be entitled to rely upon such information in the performance of the Services under this Agreement as if such information was provided to ADP by Client directly. 14.2 ADP Marketplace. Enable Client to build applications and/or purchase available applications via online store. Provide access to certain Client data stored in ADP systems via industry-standard Application Programming Interfaces (APis). The following additional terms apply to the ADP Marketplace (applies only if Client accesses ADP Marketplace Services): 14.2.1 Transmitting Information to Third Parties. In the event that Client elects to use an API to provide any Client Content or employee or plan participant information to any third party, Client represents that it has acquired any consents or provided any notices required to transfer such content or information and that such transfer does not violate any applicable international, federal, state, or local laws and/or regulations. ADP shall not be responsible for any services or data provided by any such third party. 14.2.2 Use of the ADP APis. Client will use the ADP APis to access Client's information only. Client may not use any robot, spider, or other automated process to scrape, crawl, or index the ADP Marketplace and will integrate Client's application with the ADP Marketplace only through documented APis expressly made available by ADP. Client also agrees that Client will not (a) use the ADP Marketplace or any ADP API to transmit spam or other unsolicited email; (b) take any action that may impose an unreasonable or disproportionately large load on the ADP infrastructure, as determined by ADP; or (c) use the ADP APis or the ADP Marketplace in any way that threatens the integrity, performance or reliability of the ADP Marketplace, Services or ADP infrastructure. ADP may limit the number of requests that Client can make to the ADP API gateway to protect ADP's system or to enforce reasonable limits on Client's use of the ADP APis. Specific throttling limits may be imposed and modified from time to time by ADP. 15 Miscellaneous 15.1 Amendment. This Agreement may not be modified, supplemented or amended, except by a writing signed by the authorized representatives of ADP and Client. 15.2 Assignment. Neither this Agreement, nor any of the rights or obligations under this Agreement. may be assigned by any party without the prior written consent of the other party, such consent not to be unreasonably withheld. However, Client may assign any or all of its rights and obligations to any other Client Group member and ADP may assign any or all of its rights and obligations to any Affiliate of ADP, provided that any such assignment shall not release the assigning party from its obligations under this Agreement This Agreement is binding upon and inures to the benefit of the parties hereto and their respective successors and permitted assigns. 15.3 Additional Documentation. In order for ADP to perform the Services, it may be necessary for Client to execute and deliver additional documents (including reporting agent authorization, client account agreement, limited powers of attorney, etc.) and Client agrees to execute and deliver such additional documents. 15.4 Subcontracting. Notwithstanding Section 15.2, ADP reserves the right to subcontract any or all of the Services, provided that ADP remains fully responsible under this Agreement for the performance of any such subcontractor. For the avoidance of doubt, third parties used by ADP to provide delivery or courier services, including the postal service in any country or any third party courier service, and banking institutions, are not considered subcontractors of ADP. 15.5 Entire Agreement. This Agreement constitutes the entire agreement and understanding between ADP and Client with respect to its subject matter and merges and supersedes all prior discussions, agreements and understandings of every kind and nature between the parties. No party will be bound by any representation, warranty, covenant, term or condition other than as expressly stated in this Agreement. Except where the parties expressly state otherwise in a relevant exhibit, ADP Proprietary and Confidential Version 4 (10202017) ADP Major Accounts Services A-7 Major Accounts Services I Annex A General Terms and Conditions annex, appendix or schedule, in case of conflict or inconsistency between this Annex A and any such exhibit. annex, appendix or schedule, this Annex A will prevail and control. Purchase orders or statements of work submitted to ADP by Client will be for Client's internal administrative purposes only and the terms and conditions contained in any purchase order or statements of work will have no force and effect and will not amend or modify this Agreement. 15.6 No Third Party Beneficiaries. Except as expressly provided herein or in an applicable exhibit, annex, appendix or schedule, nothing in this Agreement creates, or will be deemed to create, third party beneficiaries of or under this Agreement. Client agrees that ADP's obligations in this Agreement are to Client only, and ADP has no obligation to any third party (including, without limitation, Client's personnel, directors, officers, employees, Users and any administrative authorities). 15.7 Force Majeure. Any party to this Agreement will be excused from performance of its obligations under this Agreement, except for Client's obligation to pay the fees to ADP pursuant to Section 11 , for any period of time that the party is prevented from performing its obligations under this Agreement due to an act of God, war, earthquake, civil disobedience, court order, labor disputes or disturbances, governmental regulations, communication or utility failures or other cause beyond the party's reasonable control. Such non-performance will not constitute grounds for breach. 15.8 Waiver. The failure by any party to this Agreement to insist upon strict performance of any provision of this Agreement will not constitute a waiver of that provision. The waiver of any provision of this Agreement shall only be effective if made in writing signed by the authorized representatives of ADP and Client and shall not operate or be construed to waive any future omission or breach of, or compliance with, any other provision of this Agreement. 15.9 Headings. The headings used in this Agreement are for reference only and do not define, limit, or otherwise affect the meaning of any provisions hereof. 15.10 Severability. If any provision of this Agreement is finally determined to be invalid, illegal or unenforceable by a court of competent jurisdiction, the validity, legality or enforceability of the remainder of th is Agreement will not in any way be affected or impaired and such court shall have the authority to modify such invalid, illegal or unenforceable provision to the extent necessary to render such provision valid, legal or enforceable, preserving the intent of the parties to the furthest extent permissible. 15.11 Relationship of the Parties. The performance by ADP of its duties and obligations under this Agreement will be that of an independent contractor and nothing contained in this Agreement will create, construe or imply an agency, joint venture, partnership or fiduciary relationship of any kind between ADP and Client None of ADP's employees, agents or subcontractors will be considered employees, agents or subcontractors of Client. Unless expressly stated in this Agreement, none of ADP, its employees, agents or its subcontractors may enter into contracts on behalf of, bind, or otherwise obligate Client in any manner whatsoever. 15.12 Governing Law. This Agreement is governed by the laws of the State of New York without giving effect to its conflict of law provisions. 15.13 Jurisdiction. Any disputes that may arise between ADP and Client regarding the performance or interpretation of this Agreement shall be subject to the exclusive jurisdiction of the state and federal courts of New York, New York. The parties hereby irrevocably consent to the exclusive jurisdiction of the state and federal courts of New York, New York and waive any claim that any proceedings brought in such courts have been brought in an inconvenient forum. THE PARTIES HEREBY IRREVOCABLY WAIVE THEIR RIGHT TO TRIAL BY JURY. 15.14 Counterparts. This Agreement may be signed in two or more counterparts by original, .pdf (or similar format for scanned copies of documents) or facsimile signature, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15.15 Notices. All notices required to be sent or given under this Agreement will be sent in writing and will be deemed duly given and effective (i) immediately if delivered in person, or (ii) upon confirmation of signature recording delivery, if sent via an internationally recognized overnight courier service with signature notification requested to Client at the address indicated on the signature page hereof and to ADP at 15 Waterview Boulevard, Parsippany, New Jersey 07054, Attention: Legal Department or to any other address a party may identify in writing from time to time. A copy (which shall not constitute notice) of all such notices shall be sent to ADP at One ADP Boulevard, MS 425, Roseland, New Jersey 07068, Attention: General Counsel and to Client at the address indicated on the cover page hereof. 15.16 Survival. Those provisions which by their content are intended to, or by their nature would, survive the perfonnance, termination, or expiration of this Agreement. shall survive termination or expiration of this Agreement ADP Proprietary and Confidential Version 4 (10202017) ADP Major Accounts Services A-B Major Accounts Services I Annex B Payroll, Employment Tax, Wage Payment and Employment Verifications Services A more human resource:· 1 Payroll, Employment Tax & Wage Payment Services. ADP will provide the following services: 1.1 ADP Payroll Services. Administration and processing of payroll including performing gross-to-net calculations and generating and/or transmitting of payment instructions. 1.2 ADP Employment Tax Services. Coordination of payroll-related tax and/or regulatory agency deposits, filings, and reconciliations on behalf of employers. 1.3 ADP Wage Payment Services. Payment of wages, commissions, consulting fees, or similar compensation or work-related expenses in the employment context to employees and independent contractors via direct deposit, check, or payroll debit cards, in each case to the extent the method of payment delivery is in scope, and online posting of pay statements to the extent applicable. Such services may be provided via ADPCheck Services, ADP Direct Deposit Services, and ALINE Card Services (if elected additional terms set forth in Annex J shall apply). 1.4 Print and Online Statement Services. Print and distribution of payroll checks, pay statements, and/or year-end statements, as well as online posting of pay statements and/or year-end statements. 1.5 Wage Garnishment Payment Services. Garnishment payment processing and disbursement of payments to appropriate payees as directed by client. 2 Billing. Payroll, Employment Tax & Wage Payment Services and any other Services bundled into the pricing for such services are billed immediately following Client's first payroll processing. The billing count is based on the number of pays submitted during each payroll processing period, therefore total billing may fluctuate. 3 ADP Wage Payment Services. The following additional terms and conditions apply to the ADP Wage Payment Services: 3.1 Client Credentialing. Client understands and acknowledges that the implementation and ongoing provision of Payment Services are conditioned upon Client passing (and continuing to pass) a credentialing process that ADP may deem necessary in connection with the provision of Payment Services. 3.2 Additional Requirements. Payment Services may be subject to the rules and standards of any applicable clearing house, payment and/or card networks or associations. Client and ADP each agree to comply with all such rules and standards applicable to it with respect to the Payment Services. 3.3 Funding Obligations. Client acknowledges that ADP is not a lender. As such, as a condition to receiving services, Client will remit or otherwise make available to ADP sufficient, good and available funds within the agreed-to deadline and via the agreed-to method of delivery to satisfy all of Client's third-party payment obligations covered by the Agreement. ADP will apply such funds to satisfy such third-party payment obligations. ADP will not be required to provide Payment Services if ADP has not received all funds required to satisfy Client's third-party payment obligations. Client will immediately notify ADP if it knows or should know that it will not have sufficient funds to satisfy the amounts required in connection with the Payment Services. If Client has a material adverse change in its condition, ADP may modify the funding method or deadline by which funds must be made available to ADP for payment to Payees. Client agrees to pay to ADP upon demand any amounts that have been paid by ADP to satisfy Client's third party payment obligations prior to receiving such amounts from Client. 3.4 Investment Proceeds; Commingling of Client Funds. IF ADP RECEIVES CLIENT'S FUNDS IN ADVANCE OF THE TIME ADP IS REQUIRED TO PAY SUCH FUNDS TO THIRD PARTIES, ALL AMOUNTS EARNED ON SUCH FUNDS, IF ANY, WHILE HELD BY ADP WILL BE FOR THE SOLE ACCOUNT OF ADP. ADP may commingle Client's funds with similar funds from other clients and with similar ADP and ADP-administered funds. ADP utilizes a funds control system that maintains general ledger entries by cli ent and/or by jurisdiction. 3.5 Recovery of Funds; Stop Payment Requests. Client agrees to cooperate with ADP and any other third parties to recover funds erroneously issued or transferred to any Payee or credited to any Payee's account. If Client desires to stop payment on any check or to recall or reverse any electronic payment, Client will provide ADP with a stop payment request in the form required by ADP. Client acknowledges that ADP's placement of a stop order request is not a guarantee that such stop payment will occur. 3.6 ADPCheck Services. Client agrees not to distribute any ADPChecks to Payees in a manner that would allow Payees to access the associated funds before pay date. With respect to ADPChecks drawn on an ADP bank account, to request a stop payment, Client shall provide ADP with a written stop payment order request in the form provided by ADP and ADP shall place a stop payment order in accordance with its standard operating procedures. 3.7 Full Service Direct Deposit (FSDD). Prior to the first credit to the account of any employee or other individual under FSDD services, Client shall obtain and retain a signed authorization from such employee or individual authorizing the initiation of credits to such party's account and debits of such account to recover funds credited to such account in error. 4 ADP Employment Tax Services. The following additional terms and conditions apply to the ADP Employment Tax Services: 4.1 Important Tax Information (IRS Disclosure). Notwithstanding Client's engagement of ADP to provide the ADP Employment Tax Services in the United States, please be aware that Client remains responsible for the timely filing of payroll tax returns and the timely payment of payroll taxes for its employees. The Internal Revenue Service recommends that employers enroll in the U.S. Treasury Department's Electronic Federal Tax Payment System (EFTPS) to monitor their accounts and ensure that timely tax payments are being made for them, and that online enrollment in EFTPS is available at www.eftps.gov; an enrollment form may also be obtained by calling (800) 555-4477; that state tax authorities generally offer simil ar means to verify tax payments; and that Client may contact appropriate state offices directly for details 4.2 State Unemployment Insurance Management. Subject to Section 15.7 of Annex A, Client's compliance with its obligations in Sections 4.2.1 and 4 .. 2.2 herein, and any delays caused by third parties (e.g., postal service, agency system and broker delays) and events beyond ADP's reasonable control, ADP will deliver the State Unemployment Insurance Management Services ("SUI Management Services") within the time periods established by the relevant unemployment compensation agencies. ADP Proprietary and Confidential Version 4 (1 0202017) ADP Major Accounts Services B -1 Major Acco unts Services I Annex B Payroll, Employment Tax, Wage Payment and Employment Verifications Services A more human resource:· 4.2.1 Provision of Information; Contesting Claims. Client will on an ongoing basis provide ADP and not prevent ADP from furnishing all information necessary for ADP to perform the SUI Management Services within the timeframes established or specified by ADP. The foregoing information includes without limitation the claimants' names, relevant dates, wage and separation information, state-specific required information, and other documentation to support responses to unemployment compensation agencies. 4.2.2 Transfer of Data. Client may transfer the information described in Section A to ADP via: (i) on-line connection between ADP and Client's computer system, or (ii) inbound data transmissions from Client to ADP. Client will provide the data using mutually acceptable communications protocols and delivery methods. Client will promptly notify ADP in writing if Client wishes to modify the communication protocol or delivery method. 4.2.3 Client acknowledges that ADP is not providing storage or record keeping of Client records as part of the SUI Management Services, and that if the SUI Management Services are terminated, ADP may, in conformity with Section 4 of Annex A, dispose of all such records. If the SUI Management Services are terminated, any access Client has to ADP websites containing Client's data will expire and Client will be responsible for downloading and gathering all relevant data prior to expiration of any such access that may have been granted. 5 Employment Verification Services. Client desires to receive and ADP agrees to provide the following Services to Client in addition to those already provided under the Agreement. 5.1 Definitions. Unless a capitalized term used herein is defined herein, it shall have the same meaning ascribed that term in the Agreement. 5.1.1 "FCRA" Fair Credit Reporting Act, 15 U.S.C. §1681 et seq. 5.1.2 "Verification Agent" has the meaning set forth in Section 5.2.1. 1 5.1.3 "Verification Data" has the meaning set forth in Section 5.2.1. 1. 5.1.4 "Verifiers" has the meaning set forth in Section 5.2. 1.1. 5.2 Additional Terms. To the extent Client has not opted out of receipt of Employment Verification Services, the following additional terms and conditions shall apply: 5.2.1 Verification Services and Authorization as Agent. 5.2.1.1 ADP currently provides the Employment Verification Services through The Work Number®, an Equifax Workforce Solutions service though ADP reserves the right to provide them through another entity (each, a "Verification Agent"). Notwithstanding anything to the contrary in Section 4.1 of Annex A, Client authorizes ADP and its Verification Agents to disclose, on Client's behalf, employment information (including employees' place of employment and employment status) and income information (including total wages per year to date and previous year income) of Client and Client's employees (or former employees) (collectively, "Verification Data"), to commercial, private, non-profit and governmental entities and their agents (collectively, "Verifiers"), who wish to obtain or verify any of Client's employees' (or former employees') Verification Data. Verification Data will be disclosed to Verifiers who certify they are entitled to receive such data (as described below) pursuant to the FCRA, and, in the case of income information requests, who additionally certify they have a record of the employee's consent to such disclosure or who utilize a salary key. In accordance with FCRA, Verification Data may be provided to Verifiers where (i) the employee has applied for a benefit (such as credit, other employment or social services assistance); (ii) the employee has obtained a benefit and the Verifier is seeking to (a) determine whether the employee is qualified to continue to receive the benefit; and/or (b) collect a debt or enforce other obligations undertaken by the employee in connection with the benefit; or (iii) the Verifier is otherwise entitled under FCRA to obtain the Verification Data. In certifying they have a record of the employee's consent, Verifiers generally rely on the employee's signature on the original application as authorization for the Verifier to access the employee's income data at the time of the application and throughout the life of the obligation. Client understands that Verifiers are charged for commercial verifications processed through ADP or its Verification Agents. 5.2.1.2 Data Quality. If requested by ADP, Client agrees to work with ADP during implementation to produce a test file and validate the Verification Data included in the Verification Services database using validation reports made available by ADP or its Verification Agents. If Client uses ADP's hosted payroll processing services, ADP will update the Verification Services database with the applicable Verification Data available on ADP's payroll processing system. 5.2.1.3 Notice to Furnishers of Information: Obligations of Furnishers of Information ("Notice to Furnishers"). Client certifies that it has read the Notice to Furnishers provided to Client at the following URL: https:l/www.consumer.ftc.gov/articles/pdf-0092-notice-to-furnishers.pdf. Client understands its obligations as a data furnisher set forth in such notice and under FCRA which include duties regarding data accuracy and investigation of disputes, and certifies it will comply with all such obligations. Client further understands that if it does not comply with such obligations, ADP may correct incorrect Verification Data on behalf of Client or terminate the Employment Verification Services upon 90 days prior written notice to Client. 5.2.1.4 Archival Copies. Notwithstanding anything to the contrary in Annex A, Client agrees that, after the termination of this Agreement, ADP and its Verification Agents may maintain archival copies of the Verification Data as needed to show the discharge and fulfillment of obligations to Client's employees and former employees and the provisions of Section 4.1 of Annex A will continue to apply during the time that ADP and its Verification Agents maintain any such archival copies. 5.2.1.5 Additional Termination Provisions for Employment Verification Services. ADP may, in its sole discretion, terminate the Employment Verification Services at any time upon 90 days prior written notice to Client should a Verification Agent notify ADP that it is no longer willing to provide the Employment Verification Services and ADP, after taking commercially reasonable steps, cannot engage a successor Verification Agent ADP Proprietary and Confidential Version 4 (1 0202017) ADP Major Accounts Services B-2 Major Accounts Services I Annex C Time and Attendance Services A more hurnan reso~~rce. ADP Time & Attendance Services. ADP will provide Client with those time & attendance services delivered via ADP Workforce Now including ADP Workforce Now Essential Time or ADP Workforce Now Enhanced Time ("ADP Time & Attendance Services''). For the hosted the ADP Workforce Now Enhanced Time product only, additional license terms are available at www.adp.com/llmlicenseterms. ADP Workforce Now Enhanced Time and ADP Workforce Now Essential Time products are available for use in a limited number of countries outside the United States, although certain restrictions and requirements may apply. 2 Billing for ADP Time & Attendance Services. Billing for ADP Time & Attendance Services will begin on the date such Services are available for use by Client in a production environment. 3 Time & Attendance Hardware. If ADP agrees to provide Client with the data collection devices (e.g. Timeclock, HandPunch, etc.) (the "Time & Attendance Hardware") as described in the Sales Order, the following terms will apply: 3.1 If Client procures Time & Attendance Hardware, Client shall provide and maintain an installation environment (including all power, wiring and cabling required for installation) as specified in the manufacturer's product documentation and other written instructions provided to Client by ADP. 3.2 Regarding Time & Attendance Hardware provided on a subscription basis only, Client shall not make any alterations or attach any devices thereto that are not provided by ADP, nor shall Client remove same from the place of original installation without ADP's prior consent. All right and title in the Time & Attendance Hardware procured on a subscription basis is, and at all times shall remain, that of ADP and a separate item of personal property of ADP, notwithstanding its attachment to other items or real property, and promptly upon termination of the ADP Time & Attendance Services, for any reason whatsoever, Client shall, at its expense, return such Time & Attendance Hardware in good condition, in accordance with ADP's instructions, normal wear and tear excepted. If such Time & Attendance Hardware is not promptly returned, Client agrees to purchase same at fair market value. Repairs and replacements required as a result of any of the following shall not be included in any maintenance services and shall be charged at ADP's then current rates: (i) damage, defects, or malfunctions resulting from misuse, accident, neglect, tampering, unusual physical, or electrical stress, or causes other than normal or intended use; (ii) failure of Client to provide and maintain a suitable installation environment; (iii) any alterations made to or any devices not provided by ADP attached to the Time & Attendance Hardware; and (iv) malfunctions resulting from use of badges or supplies not approved by ADP. 3.3 Maintenance Fees. Maintenance services for the Time & Attendance Hardware apply automatically to Time & Attendance Hardware obtained under the subscription option (and any charges therefore are already included in the monthly time and attendance subscription fees). The costs for maintenance services for Time & Attendance Hardware under the purchase option are not included in the purchase price for such equipment; a separate annual maintenance fee applies. Client, under the purchase option, may terminate its receipt of maintenance services by providing written notice to ADP no less than thirty (30) days prior to the end of the then current annual coverage period. ADP is not required to rebate to Client any maintenance fees relating to a current or prior coverage period. (NOTE: If Client selects the purchase option but opts not to receive (or terminates) maintenance services hereunder by executing a waiver of maintenance services, any such services provided by ADP at Client's request will be subject to ADP's then current charges for such services.) No Time & Attendance Hardware maintenance is done at the Client site. Client shall bear all delivery/shipping costs and all risk of loss during shipment/delivery of Time & Attendance Hardware relating to maintenance services. 3.4 Maintenance Services. ADP will maintain the Timeclock Equipment to be free from defects in material and workmanship as follows: Any parts found to be defective (except as specifically excluded below) shall be replaced or repaired, at ADP's or its designee's option, without charge for parts or labor, provided that the Time & Attendance Hardware has been properly installed and maintained by Client and provided that such equipment has been used in accordance with this Agreement or other accompanying documentation including, but not limited to, Client's Sales Order provided by ADP or its designee and has not been subject to abuse or tampering. ADP Proprietary and Confidential Version 4 (10202017) ADP Major Accounts Services C-1 Major Accounts Services I Annex D HR, Benefits and Talent Services A more human re>ourN, ADP HCM Services. Only those Services that have been purchased by Client (as listed on a Sales Order) will be applicable. 1.1 ADP Document Cloud. Integrated solution to support maintenance and retrieval of employee-specific documents via cloud- based technology, 1.2 Benefit Services. Benefit-related services made up of the following: 1.2.1. Health and Benefits Services. Technology to facilitate the administration of employee benefits, including applying eligibility rules, facilitating online enrollment and changes and calculating payroll deductions within a unified system, as well as providing data to carriers through ADP carrier connection services. 1.3 Business Intelligence. Provide tools to analyze and understand data. 1.3.1. Analytics. Enables an employer to gain insight from data for key Human Capital Management (HCM) metrics. 1.4 Global Data Storage. Ability to house global employee HR data (personal, employment, and job data) within HR system of record. 1.5 Human Resources Administration Services. Administration of human resource functions using a unified system to process and audit employee lifecycle events, provide compliance tracking and reporting, including new hire reporting, and automate notification and approval processes via self-service/direct access, and also including: 1.6 Talent Acquisition Solutions. Talent acquisition solutions made up of the following: 1.6.1. ADP Recruitment Management Services. Talent recruitment management technology, including talent acquisition and on-boarding for exempt and non-exempt workforce. 1.7 Talent Management Solutions. Technology to facilitate the administration of talent management services, including: 1.7.1 Performance Management. Solutions and tools to facilitate the performance management process, including goal alignment, and employee engagement 1.7.2 Compensation Management. Solutions and tools to administer the compensation planning process. 2 Billing for HR, Benefits & Talent Services. Billing for any HR, Benefits & Talent Services will begin on the date such Services are available for use by the client in a production environment 3 ADP Recruitment Management Services. The following additional terms and conditions apply to the ADP Recruitment Management Services (applies only if Client has purchased ADP Recruitment Management Services): 3.1 Hiring Practices. Client shall be exclusively responsible for all hiring practices, including, but not limited to, complying with all employment laws, including, if applicable, the monitoring, analysis and reporting of any adverse impact that may result from any specification or criteria that Client uses to rank candidates in the ADP Recruitment Management Services Application Programs. 3.2 Vendors. Client shall be exclusively responsible all access and use of the ADP Recruitment Management Services by its vendors and such vendors' compliance with the terms of this Agreement 4 Benefit Services. The following additional terms and conditions apply to the Benefit Services (applies only if Client has purchased Benefits Services): 4.1 Carrier Connections. ADP will, at Client's request, and for an additional charges as set-out in the applicable Sales Order, provide Client with the following Carrier Connections services: 4.1.1 ADP will electronically transmit employee data, including employee benefits enrollment data, to Client's carriers or other third parties authorized by Client, and Client authorizes ADP to provide such transmission on Client's behalf. Commencement of carrier connection service is subject to Client completing the configuration setup of Client Content and the format for such transmission to the designated carriers. 4.1.2 ADP's ability to transmit Client Content data is subject to the provision by Client's designated carriers of a current functional interface between ADP's systems and the designated carriers' systems. ADP will not be obligated to transmit Client's data to designated carriers if at any time Client's designated carriers fail to provide the proper interface as described above. Client is responsible for promptly reviewing all records of carrier transmissions and other reports prepared by ADP for validity and accuracy according to Client's records, and Client will notify ADP of any discrepancies promptly after receipt thereof In the event of an error or omission in carrier connection services caused by ADP, ADP will correct such error or omission, provided that Client promptly advises ADP of such error or omission. 5 Human Resource Administration Services and Talent Management Services. The following additional terms and conditions apply to the Human Resource Administration Services and/or Talent Management Services (applies only if Client has purchased Human Resource Administration Services and/or Talent Management Services): 5.1 Access and Use. To the extent that Client intends on using the Human Resource Administration Services and/or Talent Management Services for its workforce outside of the United States, Client acknowledges that it is authorized to use the Human Resource Administration Services and/or Talent Management Services only in those countries listed in the "ADP Workforce Now Suitable Geography List" as provided to Client from time to time upon request. 5.2 Residents Outside the United States. To the extent that Client uses the Human Resource Administration Services and/or the Talent Management Services to collect Personal Information about individuals resident outside the United States, Client represents and warrants: (i) the processing of that Personal Information, including the transfer itself, has been and will continue to be carried out in accordance with the relevant provisions of the applicable data protection and privacy laws; (ii) its instructions to ADP regarding the processing to be performed shall be in accordance with the applicable data protection laws; (iii) it has given the data subjects appropriate notices, and obtained any required consents; (iv) if it implements the Human Resources Administration Services and/or the Talent Management Services to collect any sensitive data elements (or special categories of data), Client shall comply with any additional requirements for the processing of these data elements; and (v) it ADP Proprietary and Confidential Version 4 (10202017) ADP Major Accollllts Services D-1 Major Accounts Services I Annex D HR, Benefits and Talent Services A more hllmao r<iSO\•rcG. shall be responsible for respecting all individual rights of access, correction or deletion and for responding to any individual or regulatory inquiries relating to such Personal Information. 6 ACA Forms Processing Services. ADP will provide the ACA Forms Processing Service solution specified in the Sales Order (and any applicable service specification) (collectively, the "ACA Forms Processing Service") to Client in accordance with the terms of this Agreement. The following terms apply if Client receives ACA Forms Processing Service with Benefits Services. 6.1 ACA Forms Processing Service a technology and software solution to assist Client in managing compliance needs related to the Affordable Care Act (ACA), including preparation and electronic filing of Forms 1 094-C and 1 095-C forms, access to evidence of benefit offering information and benefit offering audit reports. Client must use ADP Workforce Now HR and benefits services in order to purchase and implement ACA Forms Processing Service. For the avoidance of doubt, all Forms filed by ADP with the IRS on behalf of Client will be filed electronically; any Forms sent to Client for its employees by ADP shall be sent in paper form. It will then be Client's responsibility to distribute the Forms directly to its employees. 6.2 Client ACA Liaison. Client shall designate in writing to ADP the name of one person who shall serve as ADP's principal designated contact for ACA Forms Processing Service (the "Client ACA Liaison"), and such Client ACA Liaison shall have the authority to (i) provide information, instructions and direction on behalf of Client, and (ii) grant or provide approvals (other than Amendments) required or permitted under the Agreement in connection with ACA Forms Processing Service. Client shall designate an alternate Client ACA Liaison in the event the principal Client ACA Liaison is not available. 6.3 Disclaimer. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN THE SCOPE OF SERVICES, CLIENT EXPRESSLY ACKNOWLEDGES THAT ADP IS NOT THE "ADMINISTRATOR" OR "PLAN ADMINISTRATOR" AS DEFINED IN SECTION 3(16)(A) OF ERISA AND SECTION 414(g) OF THE CODE, RESPECTIVELY, NOR IS ADP A "FIDUCIARY" WITHIN THE MEANING OF ERISA SECTION 3(21 ). ADP SHALL NOT EXERCISE ANY DISCRETIONARY AUTHORITY OR DISCRETIONARY CONTROL RESPECTING MANAGEMENT OF ANY BENEFIT PLANS SPONSORED OR OFFERED BY CLIENT. ADP HAS NO DISCRETIONARY AUTHORITY OR DISCRETIONARY RESPONSIBILITY IN THE ADMINISTRATION OF THE CLIENT'S BENEFIT PLAN(S). ADP EXPRESSLY DISCLAIMS ANY WARRANTY. EITHER EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT, NON-INTERRUPTION OF USE, AND FREEDOM FROM PROGRAM ERRORS WITH RESPECT TO ACA FORMS PROCESSING SERVICE, THE ADP APPLICATION PROGRAMS OR ANY THIRD-PARTY SOFTWARE DELIVERED BY ADP. 6.4 Client Vendors. Client will at its own cost make all necessary arrangements with its third party vendors to cause such vendors to send data to and receive data from ADP as required for ADP to provide ACA Forms Processing Service. Client shall reimburse ADP for any costs ADP is required to bear in connection with or arising out of any such transmissions of data from and/or to such third party vendors. ADP Proprietary and Confidential Version 4 (10202017) ADP Major Accounts Services D-2 Major· Accounts Services I Annex L HR Assist Services A more humdll resource. 1 ADP shall agree to provide Client with a subscription-based HR service that provides Clients with access to expertise and best practice guidance relating to HR issues ("HR Assist"). HR Assist is a web-based HR resource center that provides practical tools. information and support to assist Clients with their HR compliance and administration requirements. HR Assist includes: employee handbook wizard; job description templates; employer helpdes~ (staffed by HR professionals); online alerts, newsletters and tips of the week for HR compliance and best practice; and access to a central library of thousands of best-practice documents, templates, checklists, forms, and policies that include both state and federal resources. 2 Billing for HR Assist. If Client is purchasing HR Assist and the pricing for such Services is not bundled with Client's pricing for payroll processing services, billing for such Services will begin on the earlier of (i) the date that the services are available for use by Client in a production environment OR (ii) ninety (90) days after the Effective Date. The billing count for HR Assist if the pricing for such Services is not bundled with Client's pricing for payroll processing services is based on all unique lives in the database paid in the previous calendar month. 3 Client agrees to use HR Assist for research and reference purposes only and only for its internal use. By submitting any content to ADP through HR Assist, induding message boards, forums and chat rooms, Client grants ADP a royalty-free, perpetual, irrevocable, world-wide license to use, reproduce, modify, adapt, translate, create derivative works from, distribute, publish and display all such content (in whole or in part) and to incorporate such content in other works in any form, media or technology, whether currently existing or hereafter developed. By submitting any content to ADP, Client represents and warrants to ADP that Client has the unfettered right to give such a license to ADP. Client agrees that it will not submit any content that (a) infringes on the intellectual property rights of any other person or entity, unless Client has the permission of the person or entity to submit the content and grant the license provided herein, (b) violates the privacy or publicity rights of any other person or entity, unless Client has the permission of such person or entity to submit the content and thereby grant the license provided herein, (c) is offensive, obscene, defamatory, threatening or abusive, (d) advertises any other site or business or (e) contains computer programming routines or code designed to interfere in any way with the full, proper and timely operation of HR Assist or any of the Services or any computer system. 4 Materials accessible from or added to HR Assist or web sites by third parties, such as comments posted in discussion groups, are strictly the responsibility of the third party who added such materials or made them accessible. While ADP reserves the right to monitor third-party discussions and to remove materials that ADP believes are inappropriate, ADP neither endorses nor undertakes to control, monitor, edit or assume responsibility for any such third-party material contained in or linked to HR Assist or web sites. 5 When Client subscribes to HR Assist, Client shall be permitted to make one attributed copy of a document available through HR Assist for use within its organization. Client may not make multiple copies of documents without expressed written consent of ADP. Except for individual copies and direct use by Client, Client may not copy, modify, distribute, display, transmit, use or prepare derivative works based on HR Assist or any of their contents, or remove or alter any copyright, trademark or other proprietary notice from any part of HR Assist or any of the contents except where expressly instructed to do so. 6 Pursuant to the Digital Millennium Copyright Act, ADP has registered an agent with the U.S. Copyright Office. Notices of claimed copyright infringement on any HR Services web site should be directed to: Automatic Data Processing, Inc., One ADP Boulevard, MS 325, Roseland, NJ 07068-1728, Attn: Global Privacy Officer. 7 Although ADP makes every reasonable effort to ensure that the information, tools and data provided through HR Assist. which include the HR Help Desk, are useful, accurate, and current, ADP cannot guarantee that the information, tools and data provided will be error-free. By using HR Assist. Client assumes all responsibility for and risk arising from its use of and reliance upon the contents of HR Assist services. Client agrees to defend, indemnify and hold harmless ADP and its affiliates and their successors or assigns from and against any liability whatsoever arising from or relating in any way to its use of HR Assist or any services directly related to HR Assist. ADP Proprietary and Confidential Version 4 (10202017) ADP Major Accounts Services L-1 STAFF REPORT TYPE MEETING: Regular Board Meeting MEETING DATE: March 7, 2018 SUBMITTED BY: Kevin Koeppen, Assistant Chief of Finance PROJECT: DIV. NO. All APPROVED BY: Joseph R. Beachem, Chief Financial Officer Mark Watton, General Manager SUBJECT: Communicate to the Board the Results of the Current Sewer Cost of Service Study Prepared by HDR Engineering, Inc. GENERAL MANAGER’S RECOMMENDATION: This is an informational item only. 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. 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 five years since the District’s last sewer rate study was performed, and an updated study is needed to establish rates that reflect changes in usage patterns and the legal environment. The cost of service study was prepared using the FY 2018 budget and rate model. Similar to water rate setting, sewer rates must comply with the legal constraints regarding utility ratemaking and the 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 2013, 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 maintain the current sewer rate structure; however, the charges to various customers and customer classes will change. The impact of these changes on customers and customer classes is discussed further in the Rate Analysis section of this staff report. Process and 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 2013 and covered a five-year period ending in 2018. A new 218 Notice and hearing is required to make future rate changes effective. Today we are bringing rate modifications to the Board’s attention. The next step will be to incorporate these changes into the FY 2019 rate model and budget. In May of 2018, staff will request the Board approve the FY 2019 budget and direct staff to move forward with the Proposition 218 process using updated rates based on the cost of service study. Only after the Proposition 218 hearing can the Board approve the rates. In 2013, the District executed a five-year Proposition 218 notice. The District, as well as many other agencies, use a 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 approves a separate maximum rate increase for the portion of rates due to increases in internal costs. The pass-through costs apply to rates, fees, and charges from sewer service providers and 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. 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. 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. 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. As a result of the update to the meter ratios, customers with large meters and high water use are likely to see a slightly larger increase in their monthly bill than customers with smaller meters and low water use, who will likely see a smaller increase or reduction in their monthly bill. Following is a more detailed analysis of the impact by customer class based on billable water usage or meter size. Residential Customers The below table summarizes the impact on individual residential bills based on the current customer winter averages. Multi-Residential Customers The below table summarizes the impact per dwelling unit for multi- residential bills based on each multi-residential complex. Winter Average Range (HCF) # of Customers Winter Average Monthly Consumption (HCF) Current Monthly Charge Proposed Monthly Charge $ Inc/( Dec) % Inc/(Dec) 0 - 10 2,956 6.1 $31.33 $30.78 ($0.55) -1.8% 10.1 - 20 1,315 13.8 $49.55 $49.63 $0.08 0.2% 20.1 - 29 169 23.7 $73.01 $73.91 $0.90 1.2% 29.1 - 35 76 36.2 $95.92 $97.61 $1.69 1.8% # of Customers # of Dwelling Units # of Meters Winter Average per Dwelling Unit (HCF) Current Monthly Charge per Dwelling Unit Proposed Monthly Charge per Dwelling Unit $ Inc/( Dec) % Inc/(Dec) 1 676 37 5.5 $19.71 $20.38 $0.67 3.4% 1 282 9 5.5 $22.77 $24.02 $1.25 5.5% 1 96 1 4.3 $12.53 $13.05 $0.52 4.2% 1 192 2 4.4 $12.67 $13.19 $0.52 4.1% Schools The below table summarizes the impact on the individual school’s monthly charges based on the customer’s meter size. The impact seen by some of the schools is a combination of the change in the fixed charge and the consumption charge. In the case of the larger meter size, both the fixed charge and consumption charge increased, while only the consumption charge increased in the smaller meter size. Churches The below table summarizes the impact on individual church monthly charges based on the customer’s meter size. Similar to the impacts in the school rate, the church rate also depends on the change in the meter size and increase in the consumption charge. Commercial – Low-Strength The below table summarizes the impact on individual commercial low- strength monthly charges based on the actual customer’s meter size. The change in the bill for low-strength commercial is a result of the increase in the consumption charge, and change in the system fee based on the meter size, with a decrease for smaller meters and an increase for larger meters. Meter Size Number of Customers Monthly Average Consumption (HCF) Current Monthly Charge Proposed Monthly Charge $ Inc/( Dec) % Inc/(Dec) 1.5 1 5.4 $80.92 $80.16 ($0.76)‐0.9% 2.0 4 88.0 $331.58 $342.93 $11.35 3.4% 3.0 1 448.0 $1,281.08 $1,333.37 $52.29 4.1% 10.0 1 2,478.0 $7,508.65 $7,890.31 $381.66 5.1% Meter Size Number of Customers Monthly Average Consumption (HCF) Current Monthly Charge Proposed Monthly Charge $ Inc/( Dec) % Inc/(Dec) 0.75 1 25.6 $90.81 $78.43 ($12.38)‐13.6% 1.00 1 189.5 $491.68 $502.37 $10.69 2.2% 2.00 2 182.5 $539.04 $557.60 $18.56 3.4% Meter Size Number of Customers Monthly Average Consumption (HCF) Current Monthly Charge Proposed Monthly Charge $ Inc/( Dec) % Inc/(Dec) 0.75 16 9.2 $52.23 $38.52 ($13.71)‐26.3% 1.00 4 18.9 $89.44 $86.14 ($3.31)‐3.7% 1.50 11 35.1 $163.66 $165.79 $2.12 1.3% 2.00 11 60.4 $266.53 $275.62 $9.09 3.4% 6.00 1 472.0 $1,841.77 $1,953.00 $111.23 6.0% Commercial – Medium-Strength The below table summarizes the impact on individual commercial medium-strength monthly charges based on the actual customer’s average water usage. While the meter charge has also changed for medium-strength commercial customers, the primary bill impact is a result of the decrease in the consumption charge. Commercial – High-Strength The below table summarizes the impact on individual commercial high- strength bills based on the actual customer’s average water usage. The decrease in the bill impact for high-strength commercial customers is driven by the reduction in the consumption charge. Conclusion The sewer rates presented in the attached report have been calculated using the current rate structure, and meet the requirements of Proposition 218 as they are known today. Staff will be incorporating these rates into its FY 2019 budget, which will be presented to the Board in May. As part of the FY 2019 budget process, staff will again recommend a five-year Proposition 218 notice. In mid-2018, staff will prepare the Proposition 218 notices and in mid to late 2018 a Proposition 218 hearing will be held to adopt the rates. After the Proposition 218 hearing, the proposed rate structures and rate increase provisions would be effective in January 2019. Meter Size Number of Customers Monthly Average Consumption (HCF) Current Monthly Charge Proposed Monthly Charge $ Inc/( Dec) % Inc/(Dec) 0.75 3 3.1 $41.08 $25.50 ($15.58)‐37.9% 1.50 4 36.4 $204.05 $190.37 ($13.68)‐6.7% 2.00 5 64.5 $342.19 $323.43 ($18.76)‐5.5% Meter Size Number of Customers Annual Average Consumption (HCF) Current Monthly Charge Proposed Monthly Charge $ Inc/( Dec) % Inc/(Dec) 0.75 1 7.6 $71.36 $47.60 ($23.76)‐33.3% 1.50 4 71.6 $467.08 $378.50 ($88.58)‐19.0% 2.00 2 115.0 $744.10 $607.23 ($136.87)‐18.4% 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 2018 budgeted cost. 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 Rate Study ATTACHMENT A SUBJECT/PROJECT: Communicate to the Board the Results of the Current Sewer Cost of Service Study Prepared by HDR Engineering, Inc. COMMITTEE ACTION: This is an informational item only. 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. February 21, 2018 Summary of the Sewer  Cost of Service Study Presented by: Tom  Gould Vice President HDR Engineering, Inc. Otay Water District Attachment B 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 •Questions and discussion •Next steps 3 Purpose of the Study •Develop equitable, cost‐based, and legally  defendable rates –Meet the intent of Proposition 218 •Provide sufficient revenue to prudently  operate and maintain District’s sewer services •Review the current sewer rate structures  based on industry standard approaches 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  –Revenue neutral –Future (proposed) rate adjustments to the level of  revenues are determined in the District’s budgeting  process •Cost of Service  –Used generally accepted cost allocation techniques –Considered the District’s sewer facilities, customers,  and costs –Provided 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 2018 Revenue Requirement ($000s) FY 2018 Revenues Rate Revenues $2,810 Miscellaneous Revenues 117 Total Revenues $2,927 Expenses Total  Operations & Maintenance $2,830 Total  Taxes / Transfer 36 Net Debt Service 0 Total  To / (From) Reserves 61 Total Expenses $2,927 Bal. / (Def.) of Funds $0 9 Revenue Requirement ($000s) 9 10 Revenue Requirement Summary •Total  FY 2018 revenues balance to expenses –Revenues are a blend of the Jan 1, 2017 and  January 1, 2018 rate adjustments •Study is a “revenue neutral” analysis of the rates •Major expense for the utility is Metro O&M Costs  (≈ 30% of total costs) •Total  revenue requirement includes the total costs  associated with providing sewer service –Future rate adjustments will be determined in the  District’s budgeting process 11 Overview of Cost of Service What is cost of service? • Analysis to equitably allocate the revenue requirement to the  various customer classes of service Why cost of service •Meet the intent of Proposition 218 • Generally accepted as “fair and equitable” •Avoids subsidies • Revenues track costs Objectives of Cost of Service •Determine if subsidies exist •Develop average unit costs (i.e., cost‐based rates) 12 Generic Cost of Service Approach ‐Admin ‐Treatment  ‐Collection ‐Utilities ‐Etc. Total Expenses Volume  Related Strength  Related Customer  Related Residential Multi‐Residential Commercial Residential Multi‐Residential Commercial Residential Multi‐Residential Commercial Residential  Customers Multi‐ Residential  Customers Commercial  Customers 13 Cost of Service Summary •Cost of service analysis provides the basis for the  proposed rates –Based on customer characteristics and system  requirements •Results show the need for minor cost of service  adjustments –Reflect cost of service results to meet the intent of  Prop 218 •The cost of service provides two key pieces of  information –Allocated total costs to each class of service –Average unit costs •$ / Customer / Month (Equivalent Meter Cost) •$ / CCF 14 Summary of the Cost of Service Present  Rate  Revenues ($000s) Allocated  Revenue  Requirement  ($000s) $  Difference ($000s) %  Difference  Residential $2,264 $2,254 $11 ‐0.5% Multi‐Residential 301 313 (12) 4.1% Commercial 350 348 1 ‐0.4% Total $2,915 $2,915 $0 0.0% 15 Rate Design  •Maintained the current rate structure for all classes –Residential and multi‐family is based on 85% of  winter water consumption –Commercial is based on 85% of annual water  consumption •Revised the rates to reflect the unit costs developed  in the cost of service analysis –Update the fixed charges to be in‐line with the  meter equivalency ratios –Consumption charge revised to reflect the  allocated costs and strength levels 16 Cost‐Based Rates – Fixed Charges Current Rates Cost‐Based Rates Residential $17.08 $16.03 Multi‐Residential / Commercial ¾” $30.50 $16.03 1” 44.94 40.08 1.5” 80.92 80.16 2” 124.12 128.25 3” 224.93 240.47 4” 368.97 400.78 6” 729.04 801.56 8” 1,161.15 1,282.50 10” 1,665.25 1,843.59 17 Cost‐Based Rates – Consumption Charges Current Rates Cost‐Based Rates Residential $2.77 $2.87 Multi‐Residential 2.77 2.87 Commercial Low Strength $2.77 $2.87 Medium Strength 3.98 3.56 High Strength 6.34 4.90 Schools 2.77 2.87 Churches 2.77 2.87 18 Residential Bill Impacts Winter  Average  Range (CCF) # of  Customers Winter Avg  Monthly  Consumption  (CCF) Current  Monthly  Charge Proposed  Monthly  Charge $ Difference % Difference 0 ‐10 2,956 6.1 $31.33 $30.78 ($0.55)‐1.8% 11 – 20 1,315 13.8 $49.55 $49.63 $0.08 0.2% 21 – 29 169 23.7 $73.01 $73.91 $0.90 1.2% 30 and up 76 36.2 $95.92 $97.61 $1.69 1.8% 19 Commercial Bill Impacts ‐Schools Meter Size  # of  Customers Winter Avg  Monthly  Consumption  (CCF) Current  Monthly  Charge Proposed  Monthly  Charge $ Difference % Difference 1.5 1 5.4 $80.92 $80.16 ($0.76)‐0.9% 2.0 4 88.0 $331.58 $342.93 $11.35 3.4% 3.0 1 448.0 $1,281.08 $1,333.37 $52.29 4.1% 10.0 1 2,478.0 $7,508.65 $7,890.31 $381.66 5.1% 20 Commercial Bill Impacts ‐Churches Meter Size  # of  Customers Winter Avg  Monthly  Consumption  (CCF) Current  Monthly  Charge Proposed  Monthly  Charge $ Difference % Difference 0.75 1 25.6 $90.81 $78.43 ($12.38)‐13.6% 1.00 1 189.5 $491.68 $502.37 $10.69 2.2% 2.00 2 182.5 $539.04 $557.60 $18.56 3.4% 21 Commercial Bill Impacts –Low Strength Meter Size  # of  Customers Winter Avg  Monthly  Consumption  (CCF) Current  Monthly  Charge Proposed  Monthly  Charge $ Difference % Difference 0.75 16 9.2 $52.23 $38.52 ($13.71)‐26.3% 1.00 4 18.9 $89.44 $86.14 ($3.31)‐3.7% 1.50 11 35.1 $163.66 $165.79 $2.12 1.3% 2.00 11 60.4 $266.53 $275.62 $9.09 3.4% 6.00 1 472.0 $1,841.77 $1,953.00 $111.23 6.0% 22 Commercial Bill Impacts –Med Strength Meter Size  # of  Customers Winter Avg  Monthly  Consumption  (CCF) Current  Monthly  Charge Proposed  Monthly  Charge $ Difference % Difference 0.75 3 3.1 $41.08 $25.50 ($15.58)‐37.9% 1.50 4 36.4 $204.05 $190.37 ($13.68)‐6.7% 2.00 5 64.5 $342.19 $323.43 ($18.76)‐5.5% 23 Commercial Bill Impacts –High Strength Meter Size  # of  Customers Winter Avg  Monthly  Consumption  (CCF) Current  Monthly  Charge Proposed  Monthly  Charge $ Difference % Difference 0.75 1 7.6 $71.36 $47.60 ($23.76)‐33.3% 1.50 4 71.6 $467.08 $378.50 ($88.58)‐19.0% 2.00 2 115.0 $744.10 $607.23 ($136.87)‐18.4% 24 Next Steps… 24 •Presentation to the Board (March) •Determine overall rate adjustments during the  budgeting process (May) •Proposition 218 Process  –Set public hearing date and send customer  notification (July)  –Public presentation on proposed rates in  October (Board may adopt the proposed rates if  no major protest)  •Rate implementation (Jan 2019) DRAFT FINAL REPORT Otay Water District Review of the District’s Sewer Rates January 2018 hdrinc.com 929 108th Ave NE, Suite 1300, Bellevue, WA 98004 T 425-450-6200 January 26, 2018 Mr. Kevin Koeppen Assistant Chief of Finance Otay Water District 2554 Sweetwater Springs Blvd. Spring Valley, California 91978-2004 Subject: Comprehensive Sewer Rate Study Dear Mr. Koeppen: HDR Engineering, Inc. (HDR) is pleased to present to the Otay Water District (District) the draft final report for the 2017 comprehensive sewer rate study. The District’s comprehensive study was developed to provide a financial plan and 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. It 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 data and 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 – Comprehensive Sewer Rate Study 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 ............................................................. 5 Summary of the Sewer Rate Designs ............................................................................. 6 Summary of the Sewer Rate Study ................................................................................. 8 1 Introduction and Overview 1.1 Introduction ........................................................................................................ 9 1.2 Goals and Objectives ........................................................................................... 9 1.3 Overview of the Rate Study Process .................................................................. 10 1.4 Organization of the Study .................................................................................. 11 1.5 Summary ........................................................................................................... 11 2 Overview of the Water Rate Setting Principles 2.1 Introduction ...................................................................................................... 12 2.2 Generally Accepted Rate Setting Principles ........................................................ 12 2.3 Determining the Revenue Requirement ............................................................ 12 2.4 Analyzing Cost of Service ................................................................................... 13 2.5 Designing Utility Rates ....................................................................................... 14 2.6 Economic Theory and Rate Setting .................................................................... 14 2.7 Summary ........................................................................................................... 15 3 Development of the Revenue Requirement Analysis 3.1 Introduction ...................................................................................................... 16 3.2 Development of the Sewer Revenue Requirement Analysis ............................... 16 3.2.1 Establishing a Time Frame and Approach ................................................ 16 3.2.2 Projection of Rate and Other Miscellaneous Revenues ............................ 17 3.2.3 Projection of Operation and Maintenance Expenses ............................... 18 3.2.4 Projection of Taxes and Transfer Payments ............................................. 19 3.2.5 Projection of Capital Improvement Funding Needs.................................. 19 3.2.6 Projection of Debt Service ....................................................................... 21 3.2.7 Reserve Funding ...................................................................................... 22 3.2.8 Summary of the Sewer Revenue Requirement ........................................ 22 3.3 Consultant’s Revenue Requirement Conclusion and Recommendations ............ 23 3.4 Summary of the Sewer Revenue Requirement Analysis ..................................... 24 Table of Contents Table of Contents ii Otay Water District – Comprehensive Sewer Rate Study 4 Development of the Cost of Service Analysis 4.1 Introduction ...................................................................................................... 25 4.2 Objectives of the Cost of Service ....................................................................... 25 4.3 Determining the Customer Classes of Service .................................................... 26 4.4 General Cost of Service Procedures ................................................................... 26 4.4.1 Functionalization of Costs ...................................................................... 26 4.4.2 Classification of Costs ............................................................................. 27 4.4.3 Development of the Allocation Factors .................................................. 28 4.5 Summary of the Sewer Cost of Service Analysis ................................................. 29 4.6 Summary of the Average Unit Costs .................................................................. 30 4.7 Consultant’s Cost of Service Conclusions and Recommendations ...................... 31 4.8 Summary ........................................................................................................... 31 5 Development of the Proposed Sewer Rate Designs 5.1 Introduction ..................................................................................................... 32 5.2 Rate Design Criteria and Considerations........................................................... 32 5.3 Development of Cost-Based Sewer Rates ......................................................... 32 5.4 Current Industry Sewer Rate Structure Approach ............................................. 33 5.5 Overview of the Present Sewer Rate Structure................................................. 34 5.6 Development of the Proposed Sewer Rates ..................................................... 35 5.7 Consultant’s Rate Design Conclusions and Recommendations ......................... 36 5.8 Summary.......................................................................................................... 36 Technical Appendix – Sewer Technical Analysis Executive Summary 1 Otay Water District – Comprehensive Sewer Rate Study 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. Executive Summary “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 – Comprehensive Sewer Rate 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 rates to fund annual operating expenses and capital improvement needs. From this analysis, a determination can be made as to the overall level of sewer rate (revenue) adjustments needed 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. By anticipating future financial requirements, the District can begin planning for these changes sooner, thereby minimizing short-term rate impacts while also stabilizing long-term 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 in its most basic form, it is composed of 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, the 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. The proper and adequate funding of capital projects is important to help maintain existing facilities, provide consistent levels of service and minimize rate impacts over time. A general 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 – Comprehensive Sewer Rate Study 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 service levels). 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 funding the planned capital improvement projects. The District has taken the direction of issuing long-term debt in order to pay for several substantial infrastructure projects. 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, reserve, and debt funding provides the District with a method to fund capital over the long-term and minimize rates to the greatest extent possible. Every agency must balance the use of 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. Shown below in Table ES – 1 is a summary of the capital improvement plan for the projected five-year review period. Table ES – 1 Summary of the Sewer Capital Improvement Plan ($000s) FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Capital Improvement Projects Total Betterment Projects $2,215 $2,163 $175 $0 $0 $5 Total Replacement Projects 2,864 3,075 1,345 949 1,080 1,990 Total Capital Projects $5,079 $5,238 $1,520 $949 $1,080 $1,995 Less: Other Funding Sources Sewer Operating Reserves $0 $0 $0 $0 $0 $0 Sewer Replacement Reserves 0 439 1,345 949 1,080 1,990 Sewer Betterment Reserves 2,215 2,163 175 0 0 5 Sewer Expansion Reserves 0 0 0 0 0 0 New Long Term Debt 2,864 2,636 0 0 0 0 Total Other Funding $5,079 $5,238 $1,520 $949 $1,080 $1,995 Executive Summary 4 Otay Water District – Comprehensive Sewer Rate Study As shown in Table ES-1, the District’s betterment and replacement projects are 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 five-year period. A more detailed discussion of the sewer capital improvement funding plan is provided in Section 3 of this study. Given the projection of O&M and capital improvement funding, the sewer revenue requirement analysis was completed. Table ES - 2 provides a summary of the revenue requirement for the District’s sewer utility. Table ES – 2 Summary of the Sewer Revenue Requirement Analysis ($000) FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Revenues Sewer Rate Revenues[1] $2,810 $2,915 $2,916 $2,917 $2,918 $2,918 Miscellaneous Revenues 117 118 119 120 121 122 Total Sewer Revenues $2,927 $3,033 $3,034 $3,036 $3,038 $3,040 Expenses Total O & M $2,830 $2,975 $3,381 $3,328 $3,110 $3,275 Taxes / Transfer 36 37 37 38 39 40 Debt Service 0 0 94 236 236 236 To / (From) Reserves 61 130 (142) (78) 210 115 Total Expenses $2,927 $3,142 $3,371 $3,524 $3,594 $3,666 Bal. / (Def.) of Funds $0 ($109) ($336) ($488) ($556) ($626) Bal. as a % of Rate Rev. 0.0% 3.8% 11.5% 16.7% 19.1% 21.4% Proposed Rate Adjustment 0.0% 7.5% 7.5% 2.0% 2.0% 2.0% Add'l Revenue from Adj. $0 $109 $336 $488 $556 $626 Total Bal. /(Def.) of Funds $0 $0 ($0) $0 $0 $0 [1] Includes adopted 7.5% rate adjustment for FY 2018. As can be seen above, the revenue requirement has summed the O&M, taxes / transfers, rate funded capital, net debt service, and the change in working capital. The total revenue requirement is then compared to the total sources of funds 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 rate revenues to determine the level of rate adjustment needed to meet the revenue requirement. During this projected time period, the District’s rates appear to be deficient for FY 2019 through FY 2023. The total overall deficiency is approximately 21%. To address that deficiency, annual sewer rate adjustments are proposed for FY 2019 through FY 2023 as outlined in the table above. “During this projected time period, the District’s rates appear to be deficient for FY 2019 through FY 2023.” Executive Summary 5 Otay Water District – Comprehensive Sewer Rate Study 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, etc.). 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, while the cost of service analysis determines the fair and equitable (i.e., proportional) manner to collect the overall total revenue requirement. For the District’s study, the cost of service was performed with an assumed 0.0% rate adjustment. This means that there was only the cost of service between customer classes that was adjusted and the overall revenue requirement was not adjusted. This was done because there are a number of capital and financial assumptions that are yet to be finalized for the District. When this has been completed, the District will adopt rate adjustments that will simply adjust the level of rates as the cost of service component will have been adjusted already. In summary form, the 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 classified into their various cost components (volume, strength, customer-related). The individual classification totals were then equitably allocated to the various customer classes of service based on the appropriate and proportional allocation factors. The allocated 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 Residential $2,264 $2,254 $11 -0.5% Multi-Residential 301 313 (12) 4.1% Commercial 350 348 1 -0.4% Total $2,915 $2,915 $0 0.0% 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 Executive Summary 6 Otay Water District – Comprehensive Sewer Rate Study service is as 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. In that respect, 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 charges and by consumptive use. 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. 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. As mentioned previously, for the District’s study, the allocated costs in the cost of service analysis do not include a rate adjustment. Therefore, the proposed rates are designed to be “revenue neutral” and collect approximately the same amount of revenue as the current rates would. The difference, however, is that the cost of service unit costs have realigned where the revenue is collect 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. However, the relationships between fixed and consumption charges have been revised to be reflective of the District’s costs as determined within the cost of service analysis. As no future rate adjustments have been assumed for the rate design, only the proposed rates have been shown. Executive Summary 7 Otay Water District – Comprehensive Sewer Rate Study Table ES – 4 Summary of the Present and Proposed Sewer Rates Present Rates Proposed Rates Fixed Charge ($/Month) – Residential Monthly System Fee $17.08 $16.03 Multi-Resident. / Comm. 3/4" $30.50 $16.03 1" 44.94 40.08 1-1/2" 80.92 80.16 2" 124.12 128.25 3" 224.93 240.47 4" 368.97 400.78 6" 729.04 801.56 8" 1,161.15 1,282.50 10" 1,665.25 1,843.59 Consumption Charge ($/CCF) – Residential Billed @ 85% of WW Avg $2.77 $2.87 Multi-Residential Billed @ 85% of WW Avg $2.77 $2.87 Commercial Low Strength $2.77 $2.87 Medium Strength 3.98 3.56 High Strength 6.34 4.90 Schools 2.77 2.87 Churches 2.77 2.87 As can be seen, the District has three 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, water consumption is used as a surrogate for wastewater contributions. The District adjusts the water consumption for residential and multi-residential customers to 85% of the average winter water use. 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 2019 and for a typical residential customer being billed 8 CCF/month, the change in their monthly bill will be approximately $1.18/month, or a monthly sewer bill which goes from $39.24 to $40.42. Executive Summary 8 Otay Water District – Comprehensive Sewer Rate Study Section 4 of this study provides a more detailed discussion of the present and proposed sewer rates. 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 9 Otay Water District – Comprehensive Sewer Rate Study 1.1 Introduction HDR was retained by Otay Water District (District) to conduct a comprehensive sewer rate 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 rate 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. 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. 1 Introduction and Overview “At its very core, Proposition 218 requires a sewer utility to establish cost-based rates for the services provided.” Introduction and Overview 10 Otay Water District – Comprehensive Sewer Rate Study 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. 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 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 water and wastewater 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 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 11 Otay Water District – Comprehensive Sewer Rate Study 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. 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 12 Otay Water District – Comprehensive Sewer Rate Study 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 2 Overview of Rate Setting Principles Overview of Rate Setting Principles 13 Otay Water District – Comprehensive Sewer Rate Study capital expenditures on a “pay-as-you-go” basis given that some major capital projects may have 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. 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 + Capital Improv. Funded From Rates ;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: 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 classified to specific cost components. Classification refers to the arrangement of the functionalized data into cost components. For example, a utility’s sewer costs are typically classified as volume, strength, or customer-related. 3. Once the costs are classified into components, they are proportionally allocated to the customer classes of service (e.g., residential, multi-residential, commercial). The allocation 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 14 Otay Water District – Comprehensive Sewer Rate Study 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 allocated to each class of service based on the total number of customers in that class of service. Once costs are allocated, 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. In other words, assuming the sewer revenue requirement is $3.0 million 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 average unit costs. Average unit costs are the allocated costs divided by the appropriate consumption (billing) units. This provides an understanding of the cost on a $/customer/month and $/hundred cubic feet (CCF)3 basis. These 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 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. 3 A CCF = one-hundred cubic feet. One (1) CCF of water = 748 gallons of water “Economic theory suggests that the price of a commodity must roughly equal its cost if equity among customers is to be maintained.” Overview of Rate Setting Principles 15 Otay Water District – Comprehensive Sewer Rate Study 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 Analysis 16 Otay Water District – Comprehensive Sewer Rate Study 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, as developed herein, assumes the full and proper 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 of the five year period of FY 2019 through FY 2023 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 2018 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 3 Development of the Revenue Requirement Analysis “ . . . the revenue requirement analysis, as developed herein, assumes the full and proper funding needed to operate and maintain the District’s sewer system on a financially sound and prudent basis. uring this projected time Development of the Revenue Requirement Analysis 17 Otay Water District – Comprehensive Sewer Rate Study establish their water revenue requirements. Table 3 - 1 provides a summary of the “cash basis” approach and cost components used to develop the District’s sewer revenue requirement. Table 3 – 1 Overview of the District’s “Cash Basis” Sewer Revenue Requirements + Sewer Operation and Maintenance Expenses 9 Power Costs 9 Administrative Expenses 9 Materials and Maintenance (includes Metro O&M) 9 Labor and Benefits + Taxes and Transfers + Rate Funded Capital + Debt Service (P + I) – Existing and Future ± To / (From) Reserves = Total Sewer Revenue Requirement о Miscellaneous Revenues = Net Revenue Requirement (Balance Required from Rates) 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 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 the 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 2018, it is calculated that the District will receive approximately $2.8 million in rate revenues for the sewer utility, with the vast majority of those Development of the Revenue Requirement Analysis 18 Otay Water District – Comprehensive Sewer Rate Study revenues being received from the residential customer class of service. With assumed customer growth on the system, by FY 2023, rate revenues are projected to increase to approximately $2.9 million. It should be noted that the District’s sewer system is relatively small and has limited opportunities for customer growth. In addition to rate revenues, the District also receives a limited amount of non-operating (miscellaneous) revenues. These miscellaneous revenues are related to property tax proceeds, late fees, non-operating revenues, etc. In FY 2018, miscellaneous revenues are approximately $117,000. By 2023, it is projected that miscellaneous revenues will increase slightly to approximately $122,000. In total, including rate and miscellaneous revenue sources, the sewer utility is projected to collect approximately $2.9 million in total revenues in FY 2018. The total revenues are projected to increase slightly over time and be approximately $3.0 million by FY 2023. 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 is primarily a collection system utility. The District does have wastewater treatment capacity for purposes of their recycled water program, and although the vast majority of the District’s wastewater is treated locally by the District, the remaining wastewater is 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 budget. Budgeted O&M expenses were projected over the rate study time period based on 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). The higher escalation factors are related to medical benefits. A major O&M expense for the District is wastewater treatment from Metro. For FY 2019, the Metro expense is projected to be approximately $920,000. 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 $1.3 million in FY 2020 and then slowly reduce over time to about $852.000 in FY 2023. Metro treatment expenses are approximately a third of the total sewer O&M expenses of the District. In total, for FY 2018, the budgeted O&M expenses are $2.8 million and with the assumed escalation of costs over time, it is projected that the FY 2023 O&M expenses will be just under $3.3 million. “A major O&M expense for the District is wastewater treatment from Metro.” Development of the Revenue Requirement Analysis 19 Otay Water District – Comprehensive Sewer Rate Study 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 $35,900 in FY 2018. 3.2.5 Projection of Capital Improvement Funding Needs 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. 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” Development of the Revenue Requirement Analysis 20 Otay Water District – Comprehensive Sewer Rate Study related. The District utilizes the terms “replacement” 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 a few substantial infrastructure projects. 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, reserve, 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 – 2 is summary of the District’s capital improvement plan that was used in the development of the sewer revenue requirement. Table 3 – 2 Summary of the Sewer Capital Improvement Plan ($000s) FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Capital Improvement Projects Total Betterment Projects $2,215 $2,163 $175 $0 $0 $5 Total Replacement Projects 2,864 3,075 1,345 949 1,080 1,990 Total Capital Projects $5,079 $5,238 $1,520 $949 $1,080 $1,995 Less: Other Funding Sources Sewer Operating Reserves $0 $0 $0 $0 $0 $0 Sewer Replacement Reserves[1] 0 439 1,345 949 1,080 1,990 Sewer Betterment Reserves 2,215 2,163 175 0 0 5 Sewer Expansion Reserves 0 0 0 0 0 0 New Long Term Debt 2,864 2,636 0 0 0 0 Total Other Funding $5,079 $5,238 $1,520 $949 $1,080 $1,995 As mentioned, the District is funding capital through a mix of rates, reserves, and long-term Development of the Revenue Requirement Analysis 21 Otay Water District – Comprehensive Sewer Rate Study debt. Given this, it is important to understand the level of funding from each source. Provided below In Table 3 – 3 is a more detailed summary of the funding plan for the five-year period of FY 2019 through FY 2023. Table 3 – 3 Summary of the Sewer Capital Improvement Plan ($000s) FY 2019 – FY 2023 Funding % of Total Notes Capital Improvement Projects Total Betterment Projects $2,343 21.7% Total Replacement Projects 8,439 78.3% Total Capital Projects $10,782 100.0% Capital Improvement Funding Sources Reserves – 9 Replacement Reserves $3,323 30.8% 9 Betterment Reserves 923 8.6% Long-Term Debt 5,500 51.0% FY 2020; 30 years @ 1.7% Rate Funded 1,037 9.6% Total CIP Funding $10,782 100.0% 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 strategically reducing reserve levels based on recent policy discussions; however, the reserve levels are projected to remain at or above target based on the current financial plan. The District should continue to monitor reserve levels in order to maintain the target or minimum balances. The level of rates will also play into this analysis as they should be increased in the future to cover capital expenses which are currently being funded through reserve funds or long-term borrowing. 3.2.6 Projection of Debt Service The District currently has no outstanding long-term debt issues for the sewer utility. However, there is a new long-term debt issue assumed for FY 2020. The District has assumed a $5.5 million long-term debt issue to fund replacement capital projects. The annual debt service associated with this debt issuance is estimated at approximately $236,000/year. For purposes of this analysis, the District assumed this debt carried an interest rate of 1.7%, with a repayment period or term of 30 years. There are no additional long-term debt issuances assumed over the projected five-year 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. Development of the Revenue Requirement Analysis 22 Otay Water District – Comprehensive Sewer Rate Study 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, 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 $183,000 per year over the review period. 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 rate revenues to determine the level of rate adjustment needed to meet the revenue requirement (i.e., support cost-based levels). Table 3 – 3 provides a summary of the revenue requirement analysis for the District’s sewer utility. Development of the Revenue Requirement Analysis 23 Otay Water District – Comprehensive Sewer Rate Study Table 3 – 3 Summary of the Sewer Revenue Requirement Analysis ($000) FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Revenues Sewer Rate Revenues[1] $2,810 $2,915 $2,916 $2,917 $2,918 $2,918 Miscellaneous Revenues 117 118 119 120 121 122 Total Sewer Revenues $2,927 $3,033 $3,034 $3,036 $3,038 $3,040 Expenses Total O & M $2,830 $2,975 $3,381 $3,328 $3,110 $3,275 Taxes / Transfer 36 37 37 38 39 40 Debt Service 0 0 94 236 236 236 To / (From) Reserves 61 130 (142) (78) 210 115 Total Expenses $2,927 $3,142 $3,371 $3,524 $3,594 $3,666 Bal. / (Def.) of Funds $0 ($109) ($336) ($488) ($556) ($626) Bal. as a % of Rate Rev. 0.0% 3.8% 11.5% 16.7% 19.1% 21.4% Proposed Rate Adjustment 0.0% 7.5% 7.5% 2.0% 2.0% 2.0% Add'l Revenue from Adj. $0 $109 $336 $488 $556 $626 Total Bal. /(Def.) of Funds $0 $0 0 $0 $0 $0 [1] Includes adopted 7.5% rate adjustment for FY 2018. As can be seen in the above table, the revenue requirement analysis indicates that for FY 2018 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 in FY 2023, the District’s sewer rates are projected to be deficient by approximately $626,000 or 21.4% of the present rates. This implies that over the five-year period rates should be adjusted by an overall 21.4%. These deficiencies are caused in part by the increasing costs of Metro treatment, the added debt service associated with the funding of the District’s capital projects, and the assumed escalation of O&M costs over time. 3.3 Consultant’s Revenue Requirement Conclusions and Recommendations The revenue requirement analysis has clearly demonstrated the projected deficiencies for the sewer utility. HDR concludes that the District’s sewer rates should be adjusted to adequately meet the District’s revenue requirements. Failure to adjust the rates could potentially lead to reduced O&M, reduced service levels, deferred capital maintenance and declining reserves 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. Financially, the need for the largest adjustments occur in the FY 2019 and FY 2020 and annual adjustments of 7.5% have been proposed. Once the rates are adjusted in FY 2020, 2.0% annual adjustments are projected to be sufficient. As can be seen at the bottom of Table 3-3, with these proposed adjustments, the Development of the Revenue Requirement Analysis 24 Otay Water District – Comprehensive Sewer Rate Study additional revenue generated by the rate adjustment in each year balances to the deficiencies shown in that year. In that way, the rate adjustments for each year balance to 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 Analysis 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 rate 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 Analysis 25 Otay Water District – Comprehensive Sewer Rate Study 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. For the District’s study, the cost of service was performed with an assumed 0.0% rate adjustment. This means that there was only the cost of service between customer classes that was adjusted and the overall revenue requirement was not adjusted. This was done because there are a number of capital and financial assumptions that are yet to be finalized for the District. When this has been completed, the District will adopt rate adjustments that will simply adjust the level of rates as the cost of service component will have been adjusted already. 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. 4 Development of the Cost of Service Analysis “The sewer cost of service analysis is concerned with the equitable allocation of the total sewer revenue requirement between the various potable water customer classes of service (e.g., residential, multi- residential, and commercial).” Development of the Cost of Service Analysis 26 Otay Water District – Comprehensive Sewer Rate Study Terminology of a Sewer Cost of Service Analysis Functionalization – The arrangement of the cost data by functional category (e.g. collection, pumping, treatment). Classification – The assignment of functionalized costs to cost components (e.g. volume, strength, and customer related). Allocation – Allocating the classified 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. 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 9 Low-Strength 9 Medium Strength 9 High Strength 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, classification and allocation. 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 study, there was a limited amount of functionalization of the cost data, as the District’s records functionalized a majority of the costs. Development of the Cost of Service Analysis 27 Otay Water District – Comprehensive Sewer Rate Study 4.4.2 Classification of Costs The second analytical task performed in a sewer cost of service study is the classification of the costs. Classification 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 classified. Provided below in Table 4-1 is a summary of the functionalization and classification of plant in service. Table 4 - 1 Summary of the Functionalization and Classification of the District’s Sewer Plant in Service Asset Category Volume Related Strength BOD Related Strength 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% The classification of 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. 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 Analysis 28 Otay Water District – Comprehensive Sewer Rate Study The classification of the total revenue requirements 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 classification of the related plant item. For example, the operation and maintenance of collection lines should be classified 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. A major O&M expense for the District is the Metro treatment costs. These costs were classified as 49.0% volume-related, 24.1% BOD-related and 26.9% SS-related. These classification splits were based upon a review of the Metro bills and how those costs are passed along to the District. It is important to note that the revenue requirement that was allocated in the cost of service analysis does not include a revenue adjustment (i.e., 0.0% rate adjustment is assumed). This has been done in order to purely look at the cost of service and not incorporate any change in the level of rate revenues. The District is in the process of determining the level of rate adjustment and once the adjustment is determined, only the level of rates will be adjusted. Provided below in Table 4-2 is a summary of the classification of the FY 2019 total revenue requirements. Table 4 – 2 Summary of the Classification of the FY 2019 Revenue Requirement ($000’s) Total Volume (VOL) Biochemical Oxygen Demand (BOD) Suspended Solids (SS) Customer Related (AC + WCA) Revenue Related (RR) $2,915 $1,363 $214 $238 $1,101 $0 100.0% 46.8% 7.3% 8.2% 37.8% 0.0% The detailed exhibit of the functionalization and classification of the District’s sewer revenue requirement can be found on Exhibit 11.1 of the Technical Appendix. 4.4.3 Development of the Allocation Factors Once the classification process is complete, and the customer groups have been defined, the various classified costs were then allocated to each customer class of service. The District’s classified costs were allocated to the customer classes of service using the following allocation factors. x Volume Allocation Factor: Volume-related costs are generally allocated 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. Most large commercial Development of the Cost of Service Analysis 29 Otay Water District – Comprehensive Sewer Rate Study customers with significant landscaping have a separate irrigation meter. Given the estimated volumes of wastewater from each class of service, a proportional allocation factor was developed. The volume allocation factor developed as a part of this study can be found on Exhibit 6 within the Technical Appendix and is based on FY 2017 water consumption data. x Strength Allocation Factor: Strength-related costs are classified between BOD and SS. Both of these types of costs are allocated to each of the classes of service based upon the assumed domestic strength level of 200 mg/l for BOD and 200 mg/l for SS. For the medium strength customer class, 400 mg/l for BOD and SS was used. Lastly, for high strength customer class a BOD of 1,000 mg/l was used and 600 mg/l of SS. The strength levels were based on historical District information and industry data. The detailed strength allocation factor developed for this cost of service can be found on Exhibit 8 of the Technical Appendix. x Customer Allocation Factor: Customer costs within the cost of service analysis are allocated to the various customer classes of service based upon their respective customer counts. Two types of customer allocation factors were developed; actual and weighted. The actual customer allocation 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 allocation 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 allocation 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 allocation factors can be found on Exhibit 7 of the Technical Appendix. x Revenue-Related Allocation Factor: The revenue-related allocation factor was developed from the projected rate revenues for FY 2019. 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 allocation 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 classified into their various cost components. Next, the individual classification totals were then allocated to the various customer groups based on the appropriate allocation factors. For example, volume-related costs were allocated based on each customer class’ share of total wastewater contributions. The total costs classified to each cost component were allocated Development of the Cost of Service Analysis 30 Otay Water District – Comprehensive Sewer Rate Study between the customer classes using the allocation factors. Table 4 – 3 provides a summary of allocated cost components to each customer class of service. Table 4 – 3 Summary of the Allocation of the Classified FY 2019 Revenue Requirements to the District’s Customer Classes of Service ($000’s) Classified Multi- Residential Commercial Costs Total Residential Low-Strength Med-Strength High-Strength Volume $1,363 $1,045 $159 $128 $20 $12 BOD 214 145 24 19 6 9 TSS 238 177 27 22 7 6 Customer 1,101 876 103 122 0 0 RR 0 0 0 0 0 0 DA 0 0 0 0 0 0 Total $2,915 $2,254 $313 $290 $32 $26 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 Analysis ($000) Customer Class of Service Revenues at Present Rates Allocated Revenue Requirement Bal. / (Def.) of Funds Required % Change in Rates Residential $2,264 $2,338 ($74) 3.3% Multi-Residential 301 325 (24) 8.0% Commercial 350 362 (12) 3.3% Total $2,915 $3,024 ($109) 3.7% The above results indicate that the customer classes of service are at or near their cost of service. This means that the District’s overall sewer rate revenues collected from each customer class of service is reasonably close to their “cost of service” and reflect the proportional allocation of costs. In making this statement, it is important to note that a cost of service study is an analysis of a point in time and the District’s sewer costs, customer consumption patterns and total wastewater volumes will vary and change over time. 4.6 Summary of the Average Unit Costs As noted at the start of this section of the report, there are two key pieces of information which are derived from the cost of service analysis; the equitable allocation of the total revenue requirement (i.e., total costs) and the derivation of the average unit costs. Average unit costs Development of the Cost of Service Analysis 31 Otay Water District – Comprehensive Sewer Rate Study are essentially cost-based rates in that they are derived from the classified costs within the cost of service study. Each classified cost is divided by the appropriate billing unit (number of accounts or wastewater volumes) and a per unit charge or cost is derived. Provided below in Table 4 – 5 is a summary of the average unit costs for the District’s sewer cost of service analysis. Table 4 – 5 Summary of the Sewer Cost of Service Unit Costs Commercial Total Residential Multi- Residential Low Strength Medium Strength High Strength Volume Costs ($ / CCF) $2.17 $2.17 $2.17 $2.17 $2.17 $2.17 Strength Costs ($ / CCF) 0.69 0.69 0.69 1.44 1.38 2.73 RR / DA ($ / CCF) 0.00 0.00 0.00 0.00 0.00 0.00 Total $2.87 $2.87 $2.87 $2.87 $3.56 $4.90 Customer Costs ($ / Cust / Mo) $16.03 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 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 Proposed Sewer Rate Designs 32 Otay Water District – Comprehensive Sewer Rate Study 5.1 Introduction The final step of the District’s comprehensive sewer rate study is the design of proposed sewer rates to collect the desired levels of revenues, based upon the results of the revenue requirement and cost of service analyses. As previously mention, the cost of service analysis allocated the revenue requirement that did not include any proposed revenue adjustment. This means that the unit costs utilized in this rate design do assume a 0.0% rate adjustment. 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, etc.). 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 a proper price signal as to what their wastewater services are costing. 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. However, it should be noted that it is difficult, if not impossible, to design a rate that meets all the goals and objectives listed above. For example, it may be difficult to design a 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 is the key criterion that needs to be considered when developing the District’s proposed rates. However, the other goals and objectives may be taken into consideration to develop the rate structure, and proposed rates would be 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, which results in the development of 5 Development of the Proposed Sewer Rate Designs Development of the Proposed Sewer Rate Designs 33 Otay Water District – Comprehensive Sewer Rate Study 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 allocated between the various customer classes of service. HDR would point out that there is no 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 Current Industry Sewer Rate Structure Approach At the present time, there are no specific federal or state agencies or national association requirements/regulation on sewer rate structures. The vast majority of wastewater utilities follow the guiding principles of establishing cost-based rates that meet the utility’s O&M and capital infrastructure requirements. The Environmental Protection Agency (EPA) provides Development of the Proposed Sewer Rate Designs 34 Otay Water District – Comprehensive Sewer Rate Study pricing guidelines for wastewater utilities, but the focus is primarily on assuring adequate funding to maintain facilities, and not on a specific rate structure. The California Water Efficiency Partnership (formerly the California Urban Water Conservation Council) does have Best Management Practices (BMP) encouraging the adoption of volumetric- based wastewater utilities. The Partnership and other water conservation experts believe that having volume-based wastewater rates, where the billing is based upon water consumption, encourages water conservation. Whether the majority of consumers make the connection between the volumetric portion of their bill and their water consumption is unclear. Simply stated, most wastewater utilities do not adopt volume-based wastewater rates to encourage water conservation. Rather, most utilities view volumetric-based billing as a method that enhances customer/rate equity. 5.5 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. This is a generally-accepted sewer rate structure and it is used by sewer utilities across 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. However, an important difference is that the fixed component 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 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 allocation 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. Development of the Proposed Sewer Rate Designs 35 Otay Water District – Comprehensive Sewer Rate Study 5.6 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 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 developed in the cost of service analysis are used within the design of the final proposed rates. In doing so, the average unit costs is reflective of the allocation 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. Table 5 – 1 Summary of the Present and Proposed Sewer Rates Present Rates FY 2019 Fixed Charge ($/Month) – Residential Monthly System Fee $17.08 $16.03 Multi-Resident. / Comm. 3/4" $30.50 $16.03 1" 44.94 40.08 1-1/2" 80.92 80.16 2" 124.12 128.25 3" 224.93 240.47 4" 368.97 400.78 6" 729.04 801.56 8" 1,161.15 1,282.50 10" 1,665.25 1,843.59 Consumption Charge ($/CCF) – Residential Billed @ 85% of Winter Water Avg $2.77 $2.87 Multi-Residential Billed @ 85% of Winter Water Avg $2.77 $2.87 Commercial (85% of Annual Water Avg) Low Strength $2.77 $2.87 Medium Strength 3.98 3.56 High Strength 6.34 4.90 Schools 2.77 2.87 Churches 2.77 2.87 Development of the Proposed Sewer Rate Designs 36 Otay Water District – Comprehensive Sewer Rate Study In viewing the present and proposed rate designs it should be noted that the structure of the rates has not changed, but the relationships between the fixed and consumption charges has changed. For example, for residential customers the proposed fixed monthly charge for FY 2019 has decreased slightly and the consumption charge has increased. The proposed fixed monthly charge for multi-residential and commercial has been decreased to be reflective of the average unit costs derived in the cost of service study. At the same time, the consumption charges have increased. This is indicative of the cost of service which indicated a slightly lower level of fixed charges and a slightly greater level of volumetric charges. The proposed rates are only shown for FY 2019 as there are no proposed rate adjustments only the cost of service adjustment for FY 2019. The District is in the process of developing the needed rate adjustment which will be adopted and provides the adjustment to the revenue levels. The customer bill impacts from these proposed rates will vary by customer class of service and by consumptive use. As an example, in FY 2019 and for a typical residential customer being billed 8 CCF/month, a decrease in their monthly bill will be approximately $0.27/month, or a monthly sewer bill which goes from $39.24 to $38.97. 5.7 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. 5.8 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 – Sewer Technical Analysis FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Revenues Rate Revenues $2,810,164 $2,914,969 $2,915,844 $2,916,719 $2,917,594 $2,918,469 Miscellaneous Revenues 116,900 117,755 118,614 119,676 120,741 121,911------------------------------------------------------------------------------------------Total Revenues $2,927,064 $3,032,724 $3,034,457 $3,036,394 $3,038,335 $3,040,380 Expenses Total Operations & Maintenance $2,829,900 $2,975,099 $3,381,484 $3,328,094 $3,109,663 $3,275,225 Total Taxes / Transfer 35,900 36,618 37,350 38,097 38,859 39,637 Rate Funded Capital 0 0 0 0 0 0 Net Debt Service 0 0 93,500 235,600 235,600 235,600 Total To / (From) Reserves 61,264 130,319 (141,644)(77,776)210,087 115,450------------------------------------------------------------------------------------------Total Expenses $2,927,064 $3,142,036 $3,370,691 $3,524,015 $3,594,209 $3,665,911 Bal. / (Def.) of Funds $0 ($109,311)($336,233)($487,621)($555,874)($625,531) Bal. as a % of Rate Revenues 0.0%3.7%11.5%16.7%19.1%21.4% Proposed Rate Adjustment 0.0%7.5%7.5%2.0%2.0%2.0% Add'l Revenue from Adj.$0 $109,311 $336,233 $487,621 $555,874 $625,531 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)$50.32 $54.09 $58.15 $59.31 $60.50 $61.71 Debt Service Coverage Ratio Before Rate Adjustment 0.00 0.00 N/A N/A N/A N/A After Proposed Rate Adj.0.00 0.00 N/A N/A 2.06 1.66 Total Reserves $11,352,810 $9,022,718 $7,494,033 $6,589,308 $5,840,561 $4,064,509 Revenue Requirement Summary Exhibit 1 Sewer Cost of Service Study Otay Water District 1 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Exhibit 2 Escalation Factors Budget FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Revenues As Customer GrowthCustomer Growth Budget 0.03%0.03%0.03%0.03%0.03% As Miscellaneous RevenuesMiscellaneous Revenues Budget 1.0%1.0%1.0%1.0%1.0% As FlatFlat Budget 0.0%0.0%0.0%0.0%0.0% Expenses As LaborLabor Budget 0.0%0.0%0.0%0.0%0.0% As Benefits - OtherBenefits - Other Budget 3.0%6.0%14.5%19.5%24.5% As Benefits - MedicalBenefits - Medical Budget 6.0%5.5%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 3.5%3.5%3.5%3.5%3.5% Growth Budget 0.0%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 2 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 1 of 5 Exhibit 3 Revenue Requirement Budget FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Revenues Rate Revenues Residential $2,182,251 $2,264,467 $2,265,147 $2,265,826 $2,266,506 $2,267,186 As Customer Growth Multi-Residential 290,154 300,629 300,719 300,809 300,899 300,989 As Customer Growth Commercial 337,759 349,873 349,978 350,083 350,188 350,293 As Customer Growth------------------------------------------------------------------------------------------Total Rate Revenues $2,810,164 $2,914,969 $2,915,844 $2,916,719 $2,917,594 $2,918,469 Miscellaneous Revenues Tax Revenues $51,600 $52,100 $52,600 $53,300 $54,000 $54,800 District Provided Non-operating Revenues 35,500 35,855 36,214 36,576 36,941 37,311 As Miscellaneous Revenues Late Fee 29,800 29,800 29,800 29,800 29,800 29,800 As Flat------------------------------------------------------------------------------------------Total Miscellaneous Revenues $116,900 $117,755 $118,614 $119,676 $120,741 $121,911 Total Revenue $2,927,064 $3,032,724 $3,034,457 $3,036,394 $3,038,335 $3,040,380 Power Costs $133,500 $138,173 $143,009 $148,014 $153,194 $158,556 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 10,900 11,336 11,789 12,261 12,751 13,262 As Equipment Fees 4,100 4,182 4,266 4,351 4,438 4,527 As Miscellaneous Services 82,500 82,500 82,500 82,500 82,500 82,500 As Labor Training 0 0 0 0 0 0 As Labor Utilities 0 0 0 0 0 0 As Utilities Bad Debt Expense 5,200 5,304 5,410 5,518 5,629 5,741 As Miscellaneous 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 172,500 175,950 179,469 183,058 186,720 190,454 As Miscellaneous------------------------------------------------------------------------------------------Total Administrative Expenses $275,200 $279,272 $283,434 $287,689 $292,038 $296,483 Notes Projected 3 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 2 of 5 Exhibit 3 Revenue Requirement Budget FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 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 5,000 5,200 5,408 5,624 5,849 6,083 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 142,800 148,512 154,452 160,631 167,056 173,738 As Equipment Chemicals 5,900 6,018 6,138 6,261 6,386 6,514 As Miscellaneous Safety Equipment 0 0 0 0 0 0 As Equipment Laboratory Equipment & Supplies 8,700 9,048 9,410 9,786 10,178 10,585 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 167,600 167,600 167,600 167,600 167,600 167,600 As Labor Metro O&M Costs 820,700 919,800 1,271,500 1,139,100 819,300 852,100 District Provided Spring Valley Sewer Charge 190,000 193,800 197,676 201,630 205,662 209,775 As Miscellaneous 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 $1,340,800 $1,450,082 $1,812,293 $1,690,744 $1,382,148 $1,426,517 Labor & Benefits Labor $407,000 $407,000 $407,000 $407,000 $407,000 $407,000 As Labor WO Allocation - Sewer 295,600 307,424 319,721 332,510 345,810 359,643 As Materials & Maintenance Vacation/Sick/Holidays 43,000 44,290 46,947 53,755 64,237 79,975 As Benefits - Other FICA (Soc Sec/Medicare)30,200 32,012 33,773 35,461 37,234 39,096 As Benefits - Medical Pension 132,200 136,166 144,336 165,265 197,491 245,877 As Benefits - Other Health/Dental/Life Insurance 103,600 109,816 115,856 121,649 127,731 134,118 As Benefits - Medical Worker's Compensation 24,200 24,926 26,422 30,253 36,152 45,009 As Benefits - Other Salary Continuation Insurance 1,800 1,854 1,965 2,250 2,689 3,348 As Benefits - Other Employee Awards 0 0 0 0 0 0 As Benefits - Other OPEB 42,800 44,084 46,729 53,505 63,938 79,603 As Benefits - Other 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 $1,080,400 $1,107,572 $1,142,749 $1,201,647 $1,282,283 $1,393,668 4 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 3 of 5 Exhibit 3 Revenue Requirement Budget FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 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 35,900 36,618 37,350 38,097 38,859 39,637 As Miscellaneous------------------------------------------------------------------------------------------Total Taxes / Transfer $35,900 $36,618 $37,350 $38,097 $38,859 $39,637 Rate Funded Capital $0 $0 $0 $0 $0 $0 FY 2016 Depr. Exp. =$1,017,180 Debt Service Existing Debt $0 $0 $0 $0 $0 $0 New Sewer Loan 0 0 93,500 235,600 235,600 235,600 Calculated @ 1.7% for 30 yrs------------------------------------------------------------------------------------------Total Debt Service $0 $0 $93,500 $235,600 $235,600 $235,600 Total Less Replacement Reserves $0 $0 $0 $0 $0 $0 Net Debt Service $0 $0 $93,500 $235,600 $235,600 $235,600 To / (From) Reserves To / (From) Operating Reserves ($2,039,936)($10,081)($57,344)($77,776)($0)($0) To / (From) Replacement Reserves (156,800)(1,027,600)(171,500)0 207,887 109,650 To / (From) Betterment Reserves 2,258,000 1,168,000 87,200 0 2,200 5,800 To / (From) Expansion Reserves 0 0 0 0 0 0------------------------------------------------------------------------------------Total To / (From) Reserves $61,264 $130,319 ($141,644)($77,776)$210,087 $115,450 5 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 4 of 5 Exhibit 3 Revenue Requirement Budget FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Notes Projected Total Revenue Requirement $2,927,064 $3,142,036 $3,370,691 $3,524,015 $3,594,209 $3,665,911 Bal. / (Def.) of Funds $0 ($109,311)($336,233)($487,621)($555,874)($625,531) Bal. as a % of Rate Revenues 0.0%3.7%11.5%16.7%19.1%21.4% Proposed Rate Adjustment 0.0%7.5%7.5%2.0%2.0%2.0% Months of Adjustment 6 6 6 6 6 6 Add'l Revenue from Adj.$0 $109,311 $336,233 $487,621 $555,874 $625,531 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 $50.32 $54.09 $58.15 $59.31 $60.50 $61.71 Annual $ Change 0.00 3.77 4.06 1.16 1.19 1.21 Debt Service Coverage Ratio Before Rate Adjustment 0.00 0.00 N/A N/A N/A N/A After Proposed Rate Adj.0.00 0.00 N/A N/A 2.06 1.66 6 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 5 of 5 Exhibit 3 Revenue Requirement Budget FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Notes Projected Sewer Operating Reserves Beginning Cash Reserve Balance $3,312,754 $1,300,332 $1,307,090 $1,268,922 $1,210,827 $1,232,621 Plus: Additions 0 0 0 0 0 0 Interest 27,513 16,839 19,176 19,681 21,795 23,420 Less: Transfer to Betterment 0 0 0 0 0 0 Less: Uses of Funds (2,039,936)(10,081) (57,344) (77,776)(0)(0) Ending Balance $1,300,332 $1,307,090 $1,268,922 $1,210,827 $1,232,621 $1,256,041 Target Minimum - 90 Days of O&M $697,784 $733,586 $833,791 $820,626 $766,766 $807,590 Sewer Replacement Reserves Beginning Cash Reserve Balance $9,038,200 $8,988,918 $7,629,641 $6,216,211 $5,359,079 $4,575,580 Plus: Additions 0 0 0 0 207,887 109,650 Interest 107,518 107,323 103,071 91,867 88,614 69,073 Less: Debt Funding 0 0 0 0 0 0 Less: Uses of Funds (156,800) (1,466,600) (1,516,500) (949,000) (1,080,000) (1,990,000) Ending Balance $8,988,918 $7,629,641 $6,216,211 $5,359,079 $4,575,580 $2,764,303 Target Minimum - 4% of current assets $1,886,901 $1,886,901 $1,886,901 $1,886,901 $1,886,901 $1,886,901 Sewer Betterment Reserves Beginning Cash Reserve Balance $1,002,837 $1,058,129 $70,417 ($16,985) ($16,985) ($14,785) Plus: Additions 2,258,000 1,168,000 87,200 0 2,200 5,800 Plus: Transfer From Operating 0 0 0 0 0 0 Interest 12,292 7,288 398 0 0 0 Less: Uses of Funds (2,215,000) (2,163,000)(175,000)0 0 (5,000) Ending Balance $1,058,129 $70,417 ($16,985) ($16,985) ($14,785) ($13,985) Target Min - 180 days of Betterment exp.$1,066,685 $86,301 $0 $0 $2,466 $2,466 Sewer Expansion Reserves Beginning Cash Reserve Balance ($4,574)$5,431 $15,570 $25,884 $36,388 $47,145 Plus: Additions 0 0 0 0 0 0 Plus: Capacity Fees 10,000 10,003 10,006 10,009 10,012 10,015 As Customer Growth Interest 5 136 309 494 745 991 Less: Uses of Funds 0 0 0 0 0 0 Ending Balance $5,431 $15,570 $25,884 $36,388 $47,145 $58,151 Target Min - 180 days of Expansion exp.$0 $0 $0 $0 $0 $0 Total Reserves $11,352,810 $9,022,718 $7,494,033 $6,589,308 $5,840,561 $4,064,509 Total Target $3,651,369 $2,706,788 $2,720,692 $2,707,527 $2,656,133 $2,696,956 7 of 27 2/14/2018 DR A F T Otay Water District Inflation 0.0% Sewer Cost of Service Study Exhibit 4 Page 1 of 2 Capital Improvement Plan FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Betterment Campo Road Sewer Main Replcmnt $2,125,000 $2,125,000 $25,000 $0 $0 $0 RWCWRF Sludge Handling System 30,000 0 0 0 0 5,000 Asset Management - Sewer Implementation 30,000 28,000 0 0 0 0 RWCWRF Aeration Controls Upgrades 30,000 10,000 150,000 0 0 0------------------------------------------------------------------------------------Total Betterment Projects $2,215,000 $2,163,000 $175,000 $0 $0 $5,000 Replacement San Diego County Sanitation District Outfall $20,000 $200,000 $250,000 $300,000 $350,000 $400,000 Campo Road Sewer Main Replacement 2,125,000 2,125,000 25,000 0 0 0 Rancho San Diego Pump Station Rehab 5,000 5,000 5,000 444,000 0 0 Sewer System Rehabilitation 10,000 10,000 0 0 0 0 Trenchless Sewer Rehabilitation 75,000 5,000 0 0 0 0 Fuerte Drive Sewer Relocation 50,000 130,000 0 0 0 0 RWCWRF - Aeration Panels Replacement 50,000 100,000 200,000 0 0 0 Hillsdale Road Sewer Repairs 400,000 270,000 0 0 0 0 Calavo Basin Sewer Rehabilitation - Phase 2 19,000 130,000 845,000 5,000 0 0 Rancho San Diego Basin Sewer Rehab - Phase 2 0 0 20,000 180,000 550,000 500,000 RWCWRF - Headworks Improvements 50,000 100,000 0 0 0 0 RWCWRF - Sedimentation Basins Weirs Replcmnt 60,000 0 0 0 0 0 Calavo Basin Sewer Rehabilitation - Phase 3 0 0 0 20,000 180,000 1,090,000------------------------------------------------------------------------------------Total Replacement Projects $2,864,000 $3,075,000 $1,345,000 $949,000 $1,080,000 $1,990,000 Notes 8 of 27 2/14/2018 DR A F T Otay Water District Inflation 0.0% Sewer Cost of Service Study Exhibit 4 Page 2 of 2 Capital Improvement Plan FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Notes Future Unidentified CIP $0 $0 $0 $0 $0 $0 Total Capital Projects $5,079,000 $5,238,000 $1,520,000 $949,000 $1,080,000 $1,995,000 Less: Other Funding Sources Sewer Operating Reserves $0 $0 $0 $0 $0 $0 Sewer Replacement Reserves 0 439,000 1,345,000 949,000 1,080,000 1,990,000 Sewer Betterment Reserves 2,215,000 2,163,000 175,000 0 0 5,000 Sewer Expansion Reserves 0 0 0 0 0 0 New Long Term Debt 2,864,000 2,636,000 0 0 0 0------------------------------------------------------------------------------------Total Less: Other Funding Sources $5,079,000 $5,238,000 $1,520,000 $949,000 $1,080,000 $1,995,000 Rate Funded Capital $0 $0 $0 $0 $0 $0 9 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 1 of 3 Exhibit 5 Revenues at Present Rates 1-Jan-17 1-Jan-18 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Total Residential Fixed Charge Monthly System Fee $15.89 $17.08 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552-------------------------------------------------------------------------------------------------------------------------------------------------$72,331 $72,331 $72,331 $72,331 $72,331 $72,331 $77,748 $77,748 $77,748 $77,748 $77,748 $77,748 $900,477 Consumption Charge Billed @ 85% of WW Avg $2.58 $2.77 43,610 43,610 43,610 43,610 43,610 43,610 36,504 36,504 36,504 36,504 36,504 36,504 480,682--------------------------------------------------------------------------------------------------------------------------------------------------------------$112,513 $112,513 $112,513 $112,513 $112,513 $112,513 $101,116 $101,116 $101,116 $101,116 $101,116 $101,116 $1,281,775 Total Residential Revenue $184,844 $184,844 $184,844 $184,844 $184,844 $184,844 $178,864 $178,864 $178,864 $178,864 $178,864 $178,864 $2,182,251 Multi-Residential Fixed Charge 3/4"$28.37 $30.50 0 0 0 0 0 0 0 0 0 0 0 0 0 1"41.80 44.94 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1/2"75.27 80.92 0 0 0 0 0 0 0 0 0 0 0 0 0 2"115.46 124.12 39 39 39 39 39 39 39 39 39 39 39 39 39 3"209.24 224.93 5 5 5 5 5 5 5 5 5 5 5 5 5 4"343.23 368.97 6 6 6 6 6 6 6 6 6 6 6 6 6 6"678.18 729.04 0 0 0 0 0 0 0 0 0 0 0 0 0 8"1,080.14 1,161.15 0 0 0 0 0 0 0 0 0 0 0 0 0 10"1,549.07 1,665.25 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 Consumption Charge Billed @ 85% of WW Avg $2.58 $2.77 6,185 6,185 6,185 6,185 6,185 6,185 5,998 5,998 5,998 5,998 5,998 5,998 73,097------------------------------------------------------------------------------------------------------------------------------------------------------------$15,956 $15,956 $15,956 $15,956 $15,956 $15,956 $16,615 $16,615 $16,615 $16,615 $16,615 $16,615 $195,428 Total Multi-Residential Revenue $23,565 $23,565 $23,565 $23,565 $23,565 $23,565 $24,794 $24,794 $24,794 $24,794 $24,794 $24,794 $290,154 Rates Effective $ / CCF $ / Acct. / Mo. $ / Acct. / Mo. $ / CCF 10 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 2 of 3 Exhibit 5 Revenues at Present Rates 1-Jan-17 1-Jan-18 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Total Rates Effective Commercial Fixed Charge 3/4"$28.37 $30.50 22 22 22 22 22 22 22 22 22 22 22 22 22 1"41.80 44.94 5 5 5 5 5 5 5 5 5 5 5 5 5 1 1/2"75.27 80.92 20 20 20 20 20 20 20 20 20 20 20 20 20 2"115.46 124.12 24 24 24 24 24 24 24 24 24 24 24 24 24 3"209.24 224.93 1 1 1 1 1 1 1 1 1 1 1 1 1 4"343.23 368.97 0 0 0 0 0 0 0 0 0 0 0 0 0 6"678.18 729.04 1 1 1 1 1 1 1 1 1 1 1 1 1 8"1,080.14 1,161.15 0 0 0 0 0 0 0 0 0 0 0 0 0 10"1,549.07 1,665.25 2 2 2 2 2 2 2 2 2 2 2 2 2-------------------------------------------------------------------------------------------------------- 75 75 75 75 75 75 75 75 75 75 75 75 75 Consumption Charge (85% of water use) Low Strength $2.58 $2.77 1,765 1,765 1,765 1,765 1,765 1,765 1,765 1,765 1,765 1,765 1,765 1,765 21,185 Medium Strength 3.70 3.98 754 754 754 754 754 754 754 754 754 754 754 754 9,050 High Strength 5.90 6.34 444 444 444 444 444 444 444 444 444 444 444 444 5,333 Schools 2.58 2.77 2,791 2,791 2,791 2,791 2,791 2,791 2,791 2,791 2,791 2,791 2,791 2,791 33,489 Churches 2.58 2.77 339 339 339 339 339 339 339 339 339 339 339 339 4,068-----------------------------------------------------------------------------------------------------------------------------------------------6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 73,125 Total Commercial Revenue $27,137 $27,137 $27,137 $27,137 $27,137 $27,137 $29,156 $29,156 $29,156 $29,156 $29,156 $29,156 $337,759 $ / CCF $ / Acct. / Mo. 11 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 3 of 3 Exhibit 5 Revenues at Present Rates 1-Jan-17 1-Jan-18 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Total Rates Effective Summary Customers Residential 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 Multi-Residential 50 50 50 50 50 50 50 50 50 50 50 50 50 Commercial 75 75 75 75 75 75 75 75 75 75 75 75 75--------------------------------------------------------------------------------------------------------4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 Consumption Residential (85% of WW avg)43,610 43,610 43,610 43,610 43,610 43,610 36,504 36,504 36,504 36,504 36,504 36,504 480,682 Multi-Residential (85% of WW avg)6,185 6,185 6,185 6,185 6,185 6,185 5,998 5,998 5,998 5,998 5,998 5,998 73,097 Commercial (85% of annual use)6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 73,125--------------------------------------------------------------------------------------------------------55,888 55,888 55,888 55,888 55,888 55,888 48,596 48,596 48,596 48,596 48,596 48,596 626,904 Revenue Residential $184,844 $184,844 $184,844 $184,844 $184,844 $184,844 $178,864 $178,864 $178,864 $178,864 $178,864 $178,864 $2,182,251 Multi-Residential 23,565 23,565 23,565 23,565 23,565 23,565 24,794 24,794 24,794 24,794 24,794 24,794 290,154 Commercial 27,137 27,137 27,137 27,137 27,137 27,137 29,156 29,156 29,156 29,156 29,156 29,156 337,759-----------------------------------------------------------------------------------------------------------------------------------------------$235,546 $235,546 $235,546 $235,546 $235,546 $235,546 $232,815 $232,815 $232,815 $232,815 $232,815 $232,815 $2,810,164 FY 2018 Budget $2,839,600 Difference ($29,436) Percent -1.0% 12 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 1 of 3 Exhibit 5 Revenues at Present Rates - FY 2019 Rates Effective 1-Jan-18 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Total Residential Fixed Charge $ / Acct. / Mo. Monthly System Fee $17.08 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552-------------------------------------------------------------------------------------------------------------------------------------------------$77,748 $77,748 $77,748 $77,748 $77,748 $77,748 $77,748 $77,748 $77,748 $77,748 $77,748 $77,748 $932,978 Consumption Charge $ / CCF Billed @ 85% of WW Avg $2.77 43,610 43,610 43,610 43,610 43,610 43,610 36,504 36,504 36,504 36,504 36,504 36,504 480,682--------------------------------------------------------------------------------------------------------------------------------------------------------------$120,799 $120,799 $120,799 $120,799 $120,799 $120,799 $101,116 $101,116 $101,116 $101,116 $101,116 $101,116 $1,331,490 Total Residential Revenue $198,547 $198,547 $198,547 $198,547 $198,547 $198,547 $178,864 $178,864 $178,864 $178,864 $178,864 $178,864 $2,264,467 Multi-Residential Fixed Charge $ / Acct. / Mo. 3/4"$30.50 0 0 0 0 0 0 0 0 0 0 0 0 0 1"44.94 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1/2"80.92 0 0 0 0 0 0 0 0 0 0 0 0 0 2"124.12 39 39 39 39 39 39 39 39 39 39 39 39 39 3"224.93 5 5 5 5 5 5 5 5 5 5 5 5 5 4"368.97 6 6 6 6 6 6 6 6 6 6 6 6 6 6"729.04 0 0 0 0 0 0 0 0 0 0 0 0 0 8"1,161.15 0 0 0 0 0 0 0 0 0 0 0 0 0 10"1,665.25 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 Consumption Charge $ / CCF Billed @ 85% of WW Avg $2.77 6,185 6,185 6,185 6,185 6,185 6,185 5,998 5,998 5,998 5,998 5,998 5,998 73,097------------------------------------------------------------------------------------------------------------------------------------------------------------$17,131 $17,131 $17,131 $17,131 $17,131 $17,131 $16,615 $16,615 $16,615 $16,615 $16,615 $16,615 $202,479 Total Multi-Residential Revenue $25,310 $25,310 $25,310 $25,310 $25,310 $25,310 $24,794 $24,794 $24,794 $24,794 $24,794 $24,794 $300,629 13 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 2 of 3 Exhibit 5 Revenues at Present Rates - FY 2019 Rates Effective 1-Jan-18 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Total Commercial Fixed Charge $ / Acct. / Mo. 3/4"$30.50 22 22 22 22 22 22 22 22 22 22 22 22 22 1"44.94 5 5 5 5 5 5 5 5 5 5 5 5 5 1 1/2"80.92 20 20 20 20 20 20 20 20 20 20 20 20 20 2"124.12 24 24 24 24 24 24 24 24 24 24 24 24 24 3"224.93 1 1 1 1 1 1 1 1 1 1 1 1 1 4"368.97 0 0 0 0 0 0 0 0 0 0 0 0 0 6"729.04 1 1 1 1 1 1 1 1 1 1 1 1 1 8"1,161.15 0 0 0 0 0 0 0 0 0 0 0 0 0 10"1,665.25 2 2 2 2 2 2 2 2 2 2 2 2 2-------------------------------------------------------------------------------------------------------- 75 75 75 75 75 75 75 75 75 75 75 75 75 Consumption Charge (85% of water use)$ / CCF Low Strength $2.77 1,765 1,765 1,765 1,765 1,765 1,765 1,765 1,765 1,765 1,765 1,765 1,765 21,185 Medium Strength 3.98 754 754 754 754 754 754 754 754 754 754 754 754 9,050 High Strength 6.34 444 444 444 444 444 444 444 444 444 444 444 444 5,333 Schools 2.77 2,791 2,791 2,791 2,791 2,791 2,791 2,791 2,791 2,791 2,791 2,791 2,791 33,489 Churches 2.77 339 339 339 339 339 339 339 339 339 339 339 339 4,068-----------------------------------------------------------------------------------------------------------------------------------------------6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 73,125 Total Commercial Revenue $29,156 $29,156 $29,156 $29,156 $29,156 $29,156 $29,156 $29,156 $29,156 $29,156 $29,156 $29,156 $349,873 14 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 3 of 3 Exhibit 5 Revenues at Present Rates - FY 2019 Rates Effective 1-Jan-18 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Total Summary Customers Residential 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 4,552 Multi-Residential 50 50 50 50 50 50 50 50 50 50 50 50 50 Commercial 75 75 75 75 75 75 75 75 75 75 75 75 75--------------------------------------------------------------------------------------------------------4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 4,677 Consumption Residential (85% of WW avg)43,610 43,610 43,610 43,610 43,610 43,610 36,504 36,504 36,504 36,504 36,504 36,504 480,682 Multi-Residential (85% of WW avg)6,185 6,185 6,185 6,185 6,185 6,185 5,998 5,998 5,998 5,998 5,998 5,998 73,097 Commercial (85% of annual use)6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 6,094 73,125--------------------------------------------------------------------------------------------------------55,888 55,888 55,888 55,888 55,888 55,888 48,596 48,596 48,596 48,596 48,596 48,596 626,904 Revenue Residential $198,547 $198,547 $198,547 $198,547 $198,547 $198,547 $178,864 $178,864 $178,864 $178,864 $178,864 $178,864 $2,264,467 Multi-Residential 25,310 25,310 25,310 25,310 25,310 25,310 24,794 24,794 24,794 24,794 24,794 24,794 300,629 Commercial 29,156 29,156 29,156 29,156 29,156 29,156 29,156 29,156 29,156 29,156 29,156 29,156 349,873-----------------------------------------------------------------------------------------------------------------------------------------------$253,013 $253,013 $253,013 $253,013 $253,013 $253,013 $232,815 $232,815 $232,815 $232,815 $232,815 $232,815 $2,914,969 FY 2018 Budget $2,839,600 Difference $75,369 Percent 2.7% 15 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Exhibit 6 Volume Allocation Factor FY 2017 10%Total Annual Avg. Daily Flow Inflow and Flow at Plant Flow At % of (CCF) [1]Infiltration (CCF)Plant (MGD)Total Residential 480,682 48,068 528,750 1.08 76.7% Multi-Residential 73,097 7,310 80,407 0.16 11.7% Commercial Low StrengthLow Strength 58,742 5,874 64,616 0.13 9.4% Medium StrengthMedium Strength 9,050 905 9,955 0.02 1.4% High StrengthHigh Strength 5,333 533 5,866 0.01 0.9%0 -----------------------------------------------------------Total 626,904 62,690 689,594 1.41 100.0% Actual Flows [2]0 (VOL) Notes [1] - Increased by 15% to account for billing discount [2] - Provided by District 16 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Exhibit 7 Customer Allocation Factors Number of % of Number of Weighting Weighted % of Bills [1]Total Bills Factor [2]Customer Total Residential 4,552 97.3%4,552 1.00 4,552 79.6% Multi-Residential 50 1.1%50 10.74 537 9.4% Commercial 75 1.6%75 8.43 633 11.1%-----------------------------------------------------Total 4,677 100.0%4,677 5,722 100.0% (AC)(WCA) Notes [1] - Based on FY 2017 Billing Data [2] - Developed in the weighted meter exhibit Table 1 Actual Customer Weighted Customer 17 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Exhibit 8 Strength Allocation Factors Annual Flow Avg. Factor Calculated % of Avg. Factor Calculated % of (MG)(mg/l) Pounds [1]Total (mg/l)Pounds [1]Total Residential 396 200 0.66 73.1%200 0.66 74.3% Multi-Residential 60 200 0.10 11.1%200 0.10 11.3% Commercial Low StrengthLow Strength 48 200 0.08 8.9%200 0.08 9.1% Medium StrengthMedium Strength 7 400 0.02 2.8%400 0.02 2.8% High StrengthHigh Strength 4 1,000 0.04 4.1%600 0.02 2.5%------------------------------------------------------Total 516 0.90 100.0%0.89 100.0% (BOD)(SS) Notes [1] - Calculated Pounds = Annual Flow * Strength Factor * (8.345 lbs / One Million Gallons) Suspended SolidsBiological Oxygen Demand 18 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Exhibit 9 Revenue Allocation Factor Projected % of FY 2019 Total Residential $2,264,467 77.7% Multi-Residential 300,629 10.3% Commercial 349,873 12.0%-------------------------Total $2,914,969 100.0% (RR) 19 of 27 2/14/2018 DR A F T 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 4,552 0 0 0 0 0 0 0 0 4,552 97.3% Multi-Residential 0 0 0 39 5 6 0 0 0 50 1.1% Commercial 22 5 20 24 1 0 1 0 2 75 1.6%----------------------------------------------------------------------------------------------------Total Meters 4,574 5 20 63 6 6 1 0 2 4,677 District Weighting [2]1.50 2.50 5.00 8.00 15.00 25.00 50.00 80.00 115.00 Residential 4,552 0 0 0 0 0 0 0 0 4,552 79.6%1.00 Multi-Residential 0 0 0 312 75 150 0 0 0 537 9.4%10.74 Commercial 33 13 100 192 15 0 50 0 230 633 11.1%8.43--------------------------------------------------------------------------------------------------------------4,585 13 100 504 90 150 50 0 230 5,722 Notes [1] - Provided by the City [2] - Based on AWWA 5/8" capacity ratios [3] - Residential set at 5/8" equivalent Number of Meters Equivalent Meters 20 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study 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 21 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 1 of 3 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 2019 (VOL)(BOD)(SS)(AC)(WCA)(RR)(DA) Power Costs $138,173 $138,173 $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 11,336 0 0 0 0 11,336 0 0 100.0%WCA Fees 4,182 0 0 0 0 4,182 0 0 100.0%WCA Services 82,500 0 0 0 0 82,500 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 5,304 0 0 0 0 5,304 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 175,950 147,389 1,445 1,445 0 25,670 0 0 As Net Plant In Service------------------------------------------------------------------------------------------------------------------------Total Administrative Expenses $279,272 $147,389 $1,445 $1,445 $0 $128,992 $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 0 100.0%WCA Fleet Parts & Equipment 5,200 0 0 0 0 5,200 0 0 100.0%WCA Communication Equipment 0 0 0 0 0 0 0 0 100.0%WCA Landscaping Materials 0 0 0 0 0 0 0 0 100.0%WCA Infrastructure Equipment & Supplies 148,512 124,405 1,220 1,220 0 21,667 0 0 As Net Plant In Service Chemicals 6,018 5,041 49 49 0 878 0 0 As Net Plant In Service Safety Equipment 0 0 0 0 0 0 0 0 100.0%WCA Laboratory Equipment & Supplies 9,048 0 0 0 0 9,048 0 0 100.0%WCA Other Materials & Supplies 104 0 0 0 0 104 0 0 100.0%WCA Building & Grounds Materials 0 0 0 0 0 0 0 0 100.0%WCA Contracted Services 167,600 140,395 1,377 1,377 0 24,452 0 0 As Net Plant In Service Metro O&M Costs 919,800 450,702 221,672 247,426 0 0 0 0 49.0%VOL 24.1%BOD 26.9%SS Spring Valley Sewer Charge 193,800 193,800 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 $1,450,082 $914,343 $224,318 $250,073 $0 $61,348 $0 $0 Weighted for:Strength Related Basis of Classification 22 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 2 of 3 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 2019 (VOL)(BOD)(SS)(AC) (WCA)(RR)(DA) Weighted for:Strength Related Basis of Classification Labor & Benefits Labor $407,000 $0 $0 $0 $0 $407,000 $0 $0 100.0%WCA WO Allocation - Sewer 307,424 257,522 2,526 2,526 0 44,851 0 0 As Net Plant In Service Vacation/Sick/Holidays 44,290 0 0 0 0 44,290 0 0 100.0%WCA FICA (Soc Sec/Medicare)32,012 0 0 0 0 32,012 0 0 100.0%WCA Pension 136,166 0 0 0 0 136,166 0 0 100.0%WCA Health/Dental/Life Insurance 109,816 0 0 0 0 109,816 0 0 100.0%WCA Worker's Compensation 24,926 0 0 0 0 24,926 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 44,084 0 0 0 0 44,084 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 $1,107,572 $257,522 $2,526 $2,526 $0 $844,999 $0 $0 Total Operations & Maintenance $2,975,099 $1,457,427 $228,289 $254,044 $0 $1,035,339 $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 36,618 0 0 0 0 36,618 0 0 100.0%WCA------------------------------------------------------------------------------------------------------------------------Total Taxes / Transfer $36,618 $0 $0 $0 $0 $36,618 $0 $0 Rate Funded Capital $0 $0 $0 $0 $0 $0 $0 $0 As Total O&M Expenses 23 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Page 3 of 3 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 2019 (VOL)(BOD)(SS)(AC) (WCA)(RR)(DA) Weighted for:Strength Related Basis of Classification Debt Service Existing Debt $0 $0 $0 $0 $0 $0 $0 $0 As Total O&M Expenses New Sewer Loan 0 0 0 0 0 0 0 0 As Total O&M Expenses------------------------------------------------------------------------------------------------------------------------Total Debt Service $0 $0 $0 $0 $0 $0 $0 $0 Total Less Replacement Reserves $0 $0 $0 $0 $0 $0 $0 $0 As Total O&M Expenses Net Debt Service $0 $0 $0 $0 $0 $0 $0 $0 To / (From) Reserves To / (From) Operating Reserves ($10,081)$0 $0 $0 $0 ($10,081)$0 $0 100.0%WCA To / (From) Replacement Reserves (1,027,600)0 0 0 0 (1,027,600)0 0 100.0%WCA To / (From) Betterment Reserves 1,168,000 0 0 0 0 1,168,000 0 0 100.0%WCA To / (From) Expansion Reserves 0 0 0 0 0 0 0 0 100.0%WCA Mid-Year Adjustment Revenue (109,311) (53,549) (8,388) (9,334)0 (38,041)0 0 As Total O&M Expenses------------------------------------------------------------------------------------------------------------------------Total To / (From) Reserves $21,008 ($53,549) ($8,388) ($9,334)$0 $92,279 $0 $0 Total Revenue Requirement $3,032,724 $1,403,878 $219,901 $244,709 $0 $1,164,236 $0 $0 Less: Miscellaneous Revenue Tax Revenues $52,100 $24,118 $3,778 $4,204 $0 $20,001 $0 $0 As Total Revenue Requirements Non-operating Revenues 35,855 16,598 2,600 2,893 0 13,764 0 0 As Total Revenue Requirements Late Fee 29,800 0 0 0 0 29,800 0 0 100.0%WCA------------------------------------------------------------------------------------------------Total Miscellaneous Revenues $117,755 $40,715 $6,378 $7,097 $0 $63,565 $0 $0 Net Revenue Requirement $2,914,969 $1,363,163 $213,524 $237,612 $0 $1,100,671 $0 $0 24 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Exhibit 12 Allocation of Total Revenue Requirement FY 2019 Expenses Volume Related $1,363,163 $1,045,213 $158,945 $127,730 $19,679 $11,596 (VOL) Strength Related Bio-oxygen Demand $213,524 $156,153 $23,746 $19,083 $5,880 $8,662 (BOD) Suspended Solids 237,612 176,636 26,861 21,586 6,651 5,879 (SS)------------------------------------------------------------------------------Total Strength Related $451,136 $332,789 $50,607 $40,668 $12,531 $14,541 Customer Related Actual Customer $0 $0 $0 $0 (AC) Weighted Customer 1,100,671 875,689 103,305 121,677 (WCA)----------------------------------------------------Total Customer Related $1,100,671 $875,689 $103,305 $121,677 Revenue Related $0 $0 $0 $0 (RR) Direct Assignment $0 $0 $0 $0 (DA) Total Revenue Requirements $2,914,969 $2,253,690 $312,857 $290,076 $32,210 $26,137 High Strength Medium StrengthLow Strength Multi- ResidentialResidential Basis of Allocation Commercial 25 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Exhibit 13 Cost of Service Analysis Summary Revenues at Present Rates $2,914,969 $2,264,467 $300,629 $349,873 Allocated Revenue Requirement $2,914,969 $2,253,690 $312,857 $348,422--------------------------------------------------------Balance/(Deficiency) of Funds $0 $10,777 ($12,228)$1,451 Required % Change in Rates 0.0%-0.5%4.1%-0.4% Residential Commercial Multi- Residential 26 of 27 2/14/2018 DR A F T Otay Water District Sewer Cost of Service Study Exhibit 14 Average Unit Costs Summary Volume Costs - $/CCF $2.23 $2.17 $2.17 $2.17 $2.17 $2.17 Strength Costs - $/CCF $0.74 $0.69 $0.69 $0.69 $1.38 $2.73 Revenue/Direct - $/CCF $0.00 $0.00 $0.00 $0.00 $0.00 $0.00------------------------------------------------------------Total $/CCF $2.96 $2.87 $2.87 $2.87 $3.56 $4.90 Current Rates (1.1.18)$2.77 $2.77 $2.77 $3.98 $6.34 Customer Costs - $/Customer/Month $16.03 $16.03 $16.03 Current Rates (1.1.18) + Rate Adj $17.08 $30.50 $30.50 $30.50 $30.50 Total Average Cost - $/Cust/Month $42.46 $41.26 $48.55 $45.91 Alloc RevReq/Consumption $4.76 $4.69 $0.00 $5.93 Rev Req/Consumption 4.76 4.71 0.00 5.96 Basic Data Annual Flow - 100 CF 612,521 480,682 73,097 58,742 9,050 5,333 Number of Actual Customers 4,677 4,552 50 75 Number of Equiv. Customers 5,722 4,552 537 633 Multi- ResidentialResidential $16.03 Commercial High Strength Medium StrengthLow Strength 27 of 27 2/14/2018 DR A F T STAFF REPORT TYPE MEETING: Regular Board MEETING DATE: March 7, 2018 PROJECT: Various DIV. NO. ALL SUBMITTED BY: Adolfo Segura, Chief of Administrative Services APPROVED BY: Mark Watton, General Manager SUBJECT: FY18 MID-YEAR REPORT FOR THE DISTRICT’S FY15-18 STRATEGIC PLAN GENERAL MANAGER’S RECOMMENDATION: No recommendation. This is an informational item only. COMMITTEE ACTION: Please see “Attachment A”. PURPOSE: To provide a mid-year report on the District’s FY15-18 Strategic Performance Plan for FY18. ANALYSIS: Summary The current Otay Water District Strategic Plan is a four-year plan ranging from the start of FY15 through the end of FY18. This report details the mid-year results for the last year of our four-year plan. Strategic Plan Objectives – Target 90% Strategic Plan objectives are designed to ensure the District is executing mission designed objectives and making the appropriate high- level changes necessary to guide the agency’s efforts to meet new challenges and positively adapt to change. FY18 mid-year results are on target at 95%, with 19 of 20 active items completed or on schedule. One objective is on hold. The following objective has been put on hold: 1. Streamline Input of Operations Data – The SCADA Roadmap has been received, however, review and implementation of the plan will be incorporated into the new 3-5 year Strategic Plan. Performance Measures (Metrics) – Target 75% Performance measures are designed to track the District’s day-to-day performance. These items measure the effectiveness and efficiency of daily operations and essential services. The overall goal is that at least 75% of these measures be rated “on target”. FY18 mid-year results are above target with 32 of 37 (86%) items achieving the desired level or better. Five measures are reported at year’s end:  Enterprise Technology Services Availability  Injury Incident Rate  Debt Coverage Ratio  Reserve Level  Accounts Per FTE 0 2 4 6 8 10 12 14 16 18 COMPLETED ON SCHEDULE BEHIND ON HOLD 2 17 0 1 Completed On Schedule Behind On Hold 19 of 20 Active Objectives are Completed or On Schedule (95%) Items Not On Target 1. CIP Project Expenditures vs. Budget – Year-to-date CIP expenditures amounted to $5,801,000 vs. the budgeted amount of $20,182,000. YTD result is approximately 7% below the established target. 2. Project Closeout – Second quarter results were influenced by the Trenchless Sewer Rehabilitation Project, S2044, by 103 days. Substantial completion was reached on August 3, 2017. At that point in time, Insituform Technologies (Insituform), the contractor for the project, was provided with a construction contract punch list of items required by the District for contract acceptance. Insituform did not complete all punch list items until November 13, 2017. Contract Acceptance and the Notice of Completion was processed by staff on November 14, 2017. 3. Overtime Percentage – Year-to-date expenditures amounted to $72,395 vs. the budgeted amount of $65,000. The primary reason overtime exceeded budget was due to disruptions in the treatment process caused by abnormal effluent characteristics, which led the Reclamation Plant to have unplanned overtime. 4. Planned Recycled Water Maintenance Ratio in $ – The year-to-date total spent on all recycled tasks amounted to $457,559.92, of which $306,826.74 (67%) was spent on preventative maintenance of effluent pumps, pumps, motors, etc. The second quarter was not on target due to the amount of corrective maintenance spent on a recycled lateral leak. 5. Direct Cost of Treatment per MGD – The year-to-date result is $1,380.45 vs. the year-to-date target of $1,050.00. The Reclamation Plant experienced process upsets and more material was used to improve effluent quality to meet regulatory compliance. 0 2 4 6 8 10 12 14 16 18 ON TARGET NOT ON TARGET 32 5 On Target Not on Target 32 of 37 Performance Measures are On Target (86%) Next Steps During FY18, which is the last phase of the plan, staff will focus on the completion of remaining objectives, prioritization of a project action list from a recently developed multi-year SCADA roadmap, improvement to our asset management decision analysis, and enhancements to the District’s CIP framework. Lastly, staff will also be working on the development of the District’s new 3-5 year Strategic Plan. Committee Reports – Slideshow The Strategic Plan results are presented to both the Finance, Administration, and Communications Committee and the Engineering, Operations, and Water Resources Committee with a specific focus on the most relevant information for each Committee (see “Attachment B”). Strategic Plan is available on the Board VPN All of the Strategic Plan results and associated details are provided in a real-time, interactive web-based application available to the Board via secured remote access, VPN. The District Secretary can facilitate any password or access issues. FISCAL IMPACT: Joe Beachem, Chief Financial Officer Informational item only; no fiscal impact. STRATEGIC GOAL: Strategic Plan and Performance Measure reporting is a critical element in providing performance reporting to the Board and staff. LEGAL IMPACT: None. ATTACHMENTS: Attachment A – Committee Action Report Attachment B – PowerPoint Presentation 5 ATTACHMENT A SUBJECT/PROJECT: FY18 MID-YEAR REPORT FOR THE DISTRICT’S FY15-18 STRATEGIC PLAN COMMITTEE ACTION: Both the Finance, Administration and Communications Committee and the Engineering, Operations, and Water Resources Committee met on February 21, 2018 to review this item. The Committees support presentation to the full Board for their consideration. 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. 1 STRATEGIC PLAN FY18 MID-YEAR REPORT 2 Introduction 3OWD Strategic Plan FY15 – FY18: The District’s Strategic Plan is developed with the Balanced Scorecard (BSC) strategic planning and management methodology, which is used and widely adopted by businesses across the globe. The BSC itself was developed by Kaplan and Norton and was originally published in 1992, in the Harvard Business Review. The model has evolved over time and is now in its third-generation. In brief, the BSC emphasizes alignment of business activities to the vision and strategy of the organization with goals and measures in four basic areas: financial, customer, business processes, and learning and growth. The District’s strategic plan is designed to track key organizational project objectives, and essential day- to-day performance measures. During FY18, staff continues to execute the completion of targeted projects and evaluate the potential to further streamline work-group processes and elevate performance metrics if warranted. Additional improvements to our Asset Management program will also be addressed via a recently developed multi-year strategic SCADA roadmap and a planned update to our decision analysis CIP management framework. 4 Deliver high quality services to meet and increase confidence of the customer 1. Increase customer confidence in the District 2. Improve and expand communications 3. Provide effective water services Manage the financial issues that are critical to the District 1. Improve financial information and systems 2. Maintain District financial strength Maximize efficiency and effectiveness 1. Actively manage water supply as well as support for water and sewer services 2. Identify and evaluate improvements to enterprise and departmental business processes Provide leadership and management expertise 1. Reinforce a results-oriented and accountable culture 2. Focus on achieving a lean flexible workforce Balanced Scorecard Strategies and Goals Customer Financial Business Processes Learning & Growth $$ 5AWWA Benchmarks 1 Technical Quality Complaint Potable Water Compliance Rate Collection System Integrity Sewer Overflow Rate 2 3 4 6Objectives 95% are Completed or On Schedule 0 2 4 6 8 10 12 14 16 18 Completed On Schedule Behind On Hold 2 17 0 1 Completed On Schedule Behind On Hold Objective Report 20 Total 7 COMPLETED Objectives 1. Evaluate Implementation of an On-line Performance Management System 2. Electric Power and Fuel Management Practices 8 ON HOLD Objectives 1. Streamline Input of Operations Data 9Performance Measures 86% On Target Measure Report 37 Total 0 5 10 15 20 25 30 35 On Target Not on Target 32 5 On Target Not on Target 10Performance Measures 1. CIP Project Expenditures vs. Budget 2. Project Closeout Time 3. Overtime Percentage 4. Planned Recycled Water Maintenance Ratio in $ 5. Direct Cost of Treatment per MGD NOT ON TARGET 11 Mid-Year Results Administrative Services 12Employee Turnover Rate Target: Less than 5%turnover in a year 0 0 0 55555 0 1 2 3 4 5 6 Q1 Q2 Q3 Q4 YTD Result Target QTR:# of voluntary resignations (not including retirements)/average # of employees Measurement Method YTD:YTD # of voluntary resignations (not including retirements)/average # of employees No turnovers in Q1 & Q2 13Training Hours Per Employee Target: 12 hours or more general formal training per employee in a year (excludes safety training) 4.94 5.5 10.44 3333 12 0 2 4 6 8 10 12 14 Q1 Q2 Q3 Q4 YTD/AVG Result Target Measurement Method QTR:Total qualified training hours for all employees/average # of FTEs YTD:YTD Total qualified training hours for all employees/Average # of FTEs 14Safety Training Program Target: 24 hours or more safety training per field employee in a year 6.5 11.14 17.56 6666 24 0 5 10 15 20 25 30 Q1 Q2 Q3 Q4 YTD/AVG Result Target Measurement Method QTR:# of safety training hours for the quarter/ # of field employees YTD:YTD Total qualified safety training hours for field employees/average # of field employees 15 Engineering 16CIP Project Expenditures vs. Budget Target: 95% of budget but not to exceed 100% in a year Being below target gives the measure a “not on target” status Measurement Method OTR:Actual quarterly expenditures/Annual budget YTD:YTD expenditures/Annual budget 9.3 19.5 28.715 21 29 35 100 0 20 40 60 80 100 120 Q1 Q2 Q3 Q4 YTD Result Target 17Construction Change Order Incidence (w/o allowances) Target: No more than 5%per quarter in a year 0.1 0.5 0.5 55555 0 1 2 3 4 5 6 Q1 Q2 Q3 Q4 YTD Result Target *QTR and YTD result are the life to dare change order rates for all active projects in FY17 Measurement Method Total cost of Change Orders (not including allowances)/Total original construction contract amount (not including allowances) 18Mark-Out Accuracy Target: No less than 100%mark-out accuracy per quarter in a year 100 100 100 100 100 100 100 100 0 20 40 60 80 100 120 Q1 Q2 Q3 Q4 YTD Result Target Measurement Method # of mark-outs performed without an at-fault hit, which is damage to a District facility that results from a missing or erroneous mark- out/Total # of mark-outs performed 19Project Closeout Time Target: No more than a 45 day average per quarter in a year 0 64.5 64.5 45 45 45 45 45 0 10 20 30 40 50 60 70 Q1 Q2 Q3 Q4 YTD Result Target Measurement Method QTR:# of days between NOSC and NOC for all construction projects within the quarter/# of construction projects within the quarter YTD:YTD # of days between NOSC and NOC for all construction projects within the quarter/YTD # of construction projects within the quarter 20Annual Recycled Water Site Inspections Target: 100%of recycled sites inspected in a year (There are 153 recycled water use sites scheduled for FY18) Measurement Method Cumulative % of recycled sites inspected per quarter of those required by DEH 28.75 54.9 54.9 25 50 75 100 100 0 20 40 60 80 100 120 Q1 Q2 Q3 Q4 YTD Result Target 21Recycled Water Shutdown Testing Target: No less than 90%of recycled site shut down tests in a year (There are 39 recycled water use sites due for shutdown in FY18) Measurement Method Cumulative % of recycled site shutdown tests performed per year compared to those scheduled 28.2 48.71 48.71 22.5 45 67.5 90 90 0 10 20 30 40 50 60 70 80 90 100 Q1 Q2 Q3 Q4 YTD Result Target 22 Finance 23 Measurement Method QTR:# of all calls answered/ # of all calls received during a quarter YTD:YTD # of all calls answered/ YTD # of all calls received Answer Rate Target: No less than 97%average answer rate per quarter in a year 97.82 97.27 97.55 97 97 97 97 97 95 95.5 96 96.5 97 97.5 98 Q1 Q2 Q3 Q4 YTD Result Target 24 Measurement Method QTR:Total operations O&M costs/ # of accounts YTD:YTD total operations O&M costs/ # of accounts O&M Cost Per Account Target: Less than $561.00 per account in a single year (Target is based on Operating Budget) 117 149 265 122 153 143 143 561 100 150 200 250 300 350 400 450 500 550 Q1 Q2 Q3 Q4 YTD Result Target 25 Measurement Method QTR:# of correct bills during the reporting period/ # of total bills during the reporting period YTD:YTD # of correct bills during the reporting period/ YTD # of total bills during the reporting period Billing Accuracy Target: No less than 99.8%billing accuracy per quarter in a year 99.97 99.99 99.98 99.8 99.8 99.8 99.8 99.8 98 98.5 99 99.5 100 100.5 Q1 Q2 Q3 Q4 YTD Result Target 26Overtime Percentage Target: Less than 100%of budgeted overtime per quarter in a year (Target is based on Operating Budget; FY18 Overtime Budget is $133,800) Measurement Method QTR: Actual overtime costs (including comp time)/ Budgeted overtime costs YTD:YTD actual overtime costs (including comp time)/ YTD budgeted overtime costs 103.4 117 111 100 100 100 100 100 0 20 40 60 80 100 120 140 160 Q1 Q2 Q3 Q4 YTD Result Target 27Sewer Rate Ranking Target: Bottom 50 percentile for the 28 sewer service providers in San Diego (Otay ranks 6 out of 28 sewer service providers) Measurement Method Otay ranking for the average bill for sewer/ # of sewer agencies 66 14 14 0 5 10 15 20 25 Q1 YTD Result Target 28Water Rate Ranking Target: Bottom 50 percentile for the 22 member agencies in San Diego (Otay ranks 3 out of 22 member agencies) Measurement Method Otay ranking for the average water bill among CWA member agencies 11 11 33 0 5 10 15 20 Q1 YTD Target Result 29Percent of Customers Paying Bills Electronically Target: No less than 75%per quarter in a year Measurement Method YTD:YTD # of customers paying bills electronically/ Total # of customers QTR:# of customers paying bills electronically/ Total # of customers 76.95 76.78 76.86 75 75 75 75 75 0 10 20 30 40 50 60 70 80 90 100 Q1 Q2 Q3 Q4 YTD Result Target 30Distribution System Loss Target: Less than 5%of unaccounted water loss per quarter in a year Measurement Method 100 [volume purchased (from CWA) – (volume sold (to customers) + volume used District usage)] / volume purchased (from CWA)) 4.1 44 55555 0 1 2 3 4 5 6 7 8 9 10 Q1 Q2 Q3 Q4 YTD Result Target 31 Operations 32Technical Quality Complaint (AWWA) Target: No more than 9 complaints per 1000 customer accounts in a year Measurement Method QTR:1000 (# of technical quality complaints per quarter)/# of active customer accounts per reporting period YTD:1000 (YTD # of technical quality complaints per year)/ # of active customer accounts per reporting period) 1.49 1.19 2.68 13.1 2.25 2.25 2.25 2.25 9 0 2 4 6 8 10 12 14 Q1 Q2 Q3 Q4 YTD Result AWWA Target AW W A B e n c h m a r k 33Planned Potable Water Maintenance Ratio in $ Target: 66% or greater of all labor dollars spent on preventative maintenance per quarter in a year Measurement Method Total planned maintenance cost/ Total maintenance cost 72 72 71 66 66 66 66 66 50 55 60 65 70 75 80 85 90 95 100 Q1 Q2 Q3 Q4 YTD Result Target 34 Measurement Method Total planned maintenance costs/Total maintenance costs Planned Recycled Water Maintenance Ratio in $ Target: 70%or greater of all labor spent on preventative maintenance per quarter in a year 70 64 67 70 70 70 70 70 0 10 20 30 40 50 60 70 80 Q1 Q2 Q3 Q4 YTD Result Target 35Planned Wastewater Maintenance Ratio in $ Target: 77% or greater of all labor dollars spent on preventative maintenance per quarter in a year Measurement Method Total planned maintenance cost/Total maintenance cost 67.72 96.38 80.95 77 77 77 77 77 50 55 60 65 70 75 80 85 90 95 100 Q1 Q2 Q3 Q4 YTD Result Target 36Direct Cost of Treatment Per MGD Target: No more than $1050 per MG spent on wastewater treatment per quarter in a single year (Targets each quarter will vary based on high and low demand times) Measurement Method Total O&M costs directly attributable to sewer treatment/ Total volume in MG 1238.54 1573.51 1380.45 900 1200 1200 900 1050 0 200 400 600 800 1000 1200 1400 Q1 Q2 Q3 Q4 YTD Result Target 37O&M Cost Per MG Processed of Wastewater Target: No more than $1925 per MG spent on O&M for wastewater treatment in a year (Targets each quarter will vary based on high and low demand times) Measurement Method QTR:Total O&M cost/ MGP FYTD O&M Cost = (Power Cost) + (Staff Cost) + (Equipment Cost) / FYTP MGP YTD:FYTD O&M Cost MGP/ FYTD Total MGP 1978.39 1825.9 1913.79 1550 2100 2100 1550 1925 0 500 1000 1500 2000 2500 Q1 Q2 Q3 Q4 YTD Result Target 38Percent of PMs Completed – Fleet Maintenance Target: No less than 90%of scheduled PM’s completed per quarter in a year Measurement Method # of PM’s completed/ # of PM’s scheduled to be completed 100 100 100 90 90 90 90 90 0 20 40 60 80 100 Q1 Q2 Q3 Q4 Annual Result Target 39Percent of PMs Completed – Reclamation Plant 100 95 97 90 90 90 90 90 75 80 85 90 95 100 105 110 Q1 Q2 Q3 Q4 YTD Result Target Target: No less than 90%of scheduled PM’s completed per quarter in a year Measurement Method # of PM’s completed/ # of PM’s scheduled to be completed in a reporting period 40Percent of PMs Completed – Pump/Electric Section 100 100 100 90 90 90 90 90 75 80 85 90 95 100 105 110 Q1 Q2 Q3 Q4 YTD Result Target Target: No less than 90%of scheduled PM’s completed per quarter in a year Measurement Method # of PM’s completed/ # of PM’s scheduled to be completed in a reporting period 41System Valve Exercising Program Target: Exercise 770 valves per quarter or 3080 valves by the end of fiscal year Measurement Method Actual number of valves exercised in the reporting period 974 775 1749770 770 770 770 3080 0 500 1000 1500 2000 2500 3000 3500 Q1 Q2 Q3 Q4 YTD Result Target 42Potable Water Distribution System Integrity Target: No more than 16 leaks and breaks per 100 miles of distribution piping in a year Measurement Method 100 (annual total number of leaks + annual total number of breaks) / total miles of distribution piping 3.26 1.82 5.08 4444 16 0 2 4 6 8 10 12 14 16 18 20 Q1 Q2 Q3 Q4 YTD Result Target 43Potable Water Compliance Rate (AWWA) Target: No less than 100%of all health related drinking water standards each quarter in a year Measurement Method 100 (# of days the primary health regulations are met)/ # of days in the reporting period 100 100 100 100 100 100 100 100 100 50 60 70 80 90 100 110 Q1 Q2 Q3 Q4 YTD Result AWWA Target 44Collection System Integrity (AWWA) Target: No more than 3.6 system failures per 100 miles of collection system pipeline in a year Measurement Method QTR:100 (total number of collection system failures during the year) / total miles of collection system piping YTD:Cumulative number of failures per quarter in a FY 0 0 0 4.9 0.9 0.9 0.9 0.9 3.6 0 1 2 3 4 5 6 7 8 Q1 Q2 Q3 Q4 YTD Result AWWA Target 0 Failures in Q1 & Q2 45Recycled Water System Integrity Target: No more than 6.6 leaks or breaks per 100 miles of recycled distribution system in a year Measurement Method (100 x # of leaks or breaks)/ # of miles of distribution system 0.89 0 0.89 1.65 1.65 1.65 1.65 6.6 0 1 2 3 4 5 6 7 Q1 Q2 Q3 Q4 YTD Result Target 0 leaks or breaks Q2 46Sewer Overflow Rate (AWWA) Target: 0 overflows per quarter in a year Measurement Method QTR:100 (total number of sewer overflows during the reporting period) / total miles of pipe in the sewage collection system 0 0 0 14.7 000000 2 4 6 8 10 12 14 Q1 Q2 Q3 Q4 YTD Result AWWA Target YTD:Cumulative number of overflows per quarter in a FY 0 Failures in Q1 & Q2 47Emergency Facility Power Testing Target: 100%of the District’s facilities tested per year (The District currently has 34 powered ready facilities) Measurement Method Number of facilities tested / total facilities 29 47 47 26 44 70 100 100 0 20 40 60 80 100 Q1 Q2 Q3 Q4 YTD Result Target 48Tank Inspection and Cleaning Annual Target: Clean and inspect 7 tanks or more per year Measurement Method Number of tanks cleaned and inspected 1 4 5 77777 0 2 4 6 8 10 12 14 Q1 Q2 Q3 Q4 YTD Result Target 49Main Flushing and Fire Hydrant Maintenance Target: 215 or more mains flushed and fire hydrants maintained in a single year (The target of 215 is comprised of 165 hydrants and 50 mains) Measurement Method Number of mains flushed and hydrants maintained 50 141 191 54 54 54 54 215 0 50 100 150 200 250 Q1 Q2 Q3 Q4 YTD Result Target 50Critical Valve Exercising Annual Target: Exercise 631 identified critical valves in a year Measurement Method Number of critical valves exercised in a reporting period 625 6 631 631 631 631 631 631 0 100 200 300 400 500 600 700 800 900 1000 Q1 Q2 Q3 Q4 YTD Result Target 51 Next Steps 52 1 Complete remaining objectives Prioritization of a project action list from the SCADA roadmap Improvement to our asset management decision analysis and development of CIP framework Development of District’s new 3-5 year Strategic Plan 2 3 4