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Combined Utility System Cost of Service Rate StudyPresentation April 6, 2010

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Combined Utility System (CUS)

The CUS is an enterprise fund All funds used in the CUS are generated from

water & sewer rates and fees Does not receive any general fund money

Closed system – Under CUS master bond ordinance, cannot fund anything but water and sewer services One exception – may fund a limited amount of

drainage out of fund balance, per Ord. 2004-299 Cannot send funds to the general fund

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Recent History of CUS

Rising prices for FY04 through FY10 TCEQ Unfunded Mandate -Annual Fees 228% Chemicals 167% Electricity 136% Sludge Disposal 99% Infrastructure Maintenance (O&M) 76% Insurance 60% Health Insurance/Pension 52%

Overall O&M 32%

Annual Debt Service – First/Junior Liens 53% ($233M in FY04, $356M in FY10)

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Recent History of CUS

Residential Water Use per account

Fiscal Year 2004 - 2010 Residential consumption in gallons per month has declined as

more low flow appliances and fixtures are installed. As townhouses/condominiums replace single family homes, also

see lower consumption per account. From FY04 to FY09 the range has been from a high of 6,736 in

FY06 (drought year) to a low of 5,971 in FY07. The average from FY04 to FY09 is 6,276.

In the last 3 years average is 6,006 gallons/month. This trend continues into FY10 given the colder fall, winter and spring.

Even though lower usage recently, must have capacity for drought demand

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CUS Historical Charts

600

650

700

750

800

850

900

2004 prj

Actual*

290

340

390

440

490

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2004 prj

Actual*

4,000

5,000

6,000

7,000

2004 2005 2006 2007 2008 2009

Actuals

Total Revenues

O&M Expenditures

Average Residential Customer Gallons/Month Billed

* FY10 is current projection prj = projection

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CUS Financial Position FY07 through FY11

Full Year Revenues & Expenditures ($1,000) FY2007 FY2008 FY2009 FY2010

Projection *

FY2011 Projection without Rate Adjustment

Total Operating Revenues 615,465$ 648,637$ 687,587$ 727,068$ 717,267$ Less: Total Operating Expenses (315,348) (360,222) (374,255) (412,452) (407,000) Add: Total Nonoperating Rev (Exp) 24,735$ 34,996$ 42,215$ 36,510$ 31,013$

Income (Loss) Before Debt Services and Transfers 324,852$ 323,411$ 355,547$ 351,126$ 341,280$

Debt Services and Transfers Debt Service Transfer 258,554$ 270,779$ 305,016$ 378,103$ 415,682$ Transfer to PIB - Water & Sewer 24,211$ 25,804$ 28,419$ 26,878$ 21,744$ Pension Liability Interest 6,260$ 4,564$ 4,303$ 3,814$ 3,814$ Equipment Acquisition & Other 9,428$ 14,072$ 13,113$ 16,000$ Transfer to Stormwater 34,056$ 36,540$ 39,129$ 31,365$ 35,738$ Total Debt Services and Transfers 323,081$ 347,115$ 390,939$ 453,274$ 492,978$

Net Activity 1,771$ (23,704)$ (35,392)$ (102,148)$ (151,698)$

* February 2010 PWE MFOR Submission

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Recent Steps Taken to Decrease CUS O&M

PWE has adopted less expensive ways to treat water and buy chemicals

Cost savings in chemicals alone for FY10 will exceed $4M Implementing McKinsey & Company recommendations

for an estimated $7 million in savings in FY11 Continuing to review/re-negotiate contracts for savings

Bio-solids contract change – savings of $7.0 million over next 5 years Sludge removal contract – savings of $800k over 5 years

Began energy conservation study for major wastewater facilities Significant capital costs that will be paid for out of energy savings Long term benefits only

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FY10 Rate Study

Objectives of Rate Study Understand the System’s “cost of service” rates for each

customer class for water and wastewater Propose rates that ensure revenues fully cover the CUS’s costs

and that meet all bond covenants – debt coverage and sound business practices

Propose rates that provide for the long term health and sustainability of the system

Consider new rate structure that moves rates in the direction of covering actual cost of service for each rate class over time

Restructure program by replacing “lifeline” rate (over time) with service charge waiver or discount for qualified single family customers

Structure single family rates to encourage conservation Ensure that contract/non-City of Houston customers’ rates are set

at the “cost of service” rate – not subsidized by Houston citizens

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Options for Rate Study

The Rate Study created three financial scenariosCAPITAL IMPROVEMENT PROGRAM

(in millions)FY11 FY12 FY13 FY14 FY15

Minimum Health, Safety & Regulatory (HSR) $172 $183 $210 $210 $210

Minimum HSR Plus Selective Investments * $216 $216 $225 $225 $234

Best Practices ** $370 $370 $370 $370 $370

CIP History FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

$ Millions $291 $415 $293 $304 $360 $329 $246 $350 $256 $167

History of CUS Water and Wastewater CIP

*HSR plus other selected investments** Provide for the long term health and sustainability of the system – best practices

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CUS Annual Debt Coverage Ratio History

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.020

04

2005

2006

2007

2008

2009

2010

2011

2012

2013

2004 Projection

Act. & Forecast

Annual Debt Coverage Ratio – Threshold 1.2 Net revenues to first lien debt service

Prior to FY10, NONO use of fund balance was required for this bond covenant. FY10 requires an estimated $40M use of fund balance to meet this covenant.

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Consequences of Doing Nothing

The CUS must at least implement the Minimum Health, Safety &

Regulatory CIP to meet regulatory requirements.

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Consequences of Doing Nothing

The system will continue to lose money Likely downgrades from Rating Agencies

Moody’s assigned a NEGATIVE outlook to the CUS on March 2nd, 2010. If the CUS issues new debt without a significant rate adjustment, the System risks a ratings downgrade.

Downgrades will result in higher costs Higher interest cost over the bonds life per $100M Par. Estimates: A1 to

A2 $2.3M, A1 to A3 $3.45M & A1 to BAA1 $5.75M Letters of Credit fees increase for every ratings downgrade, per notch:

A1 to A2 $3.2M higher fees, at A2 to A3 add $0.7M plus A3 to BAA1 add $1.1M

If insured, higher insurance fees on new issues will cost more Downgrades may impact future LOC availability

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Proposed 2011Proposed 2011 Residential Monthly Water & Wastewater Bill Residential Monthly Water & Wastewater Bill

Minimum HSR CIPMeter 5/8 & 3/4" Percent of Bills 82.9%

IN 1,000 GA Existing Proposed $ Change 0 $9.97 $10.76 $0.791 9.97 $10.96 $0.992 14.70 $15.79 $1.093 14.70 $16.16 $1.464 31.85 33.76 $1.915 37.77 40.58 $2.816 46.87 48.98 $2.118 60.63 66.28 $5.65

10 74.39 83.58 $9.1912 88.15 100.88 $12.7314 106.63 122.78 $16.15

Minimum HSR Plus Selective Investments CIPMeter 5/8 & 3/4" Percent of Bills 82.9%

IN 1,000 GA Existing Proposed $ Change 0 $9.97 $11.07 $1.101 9.97 11.28 $1.312 14.70 16.24 $1.543 14.70 16.63 $1.934 31.85 34.71 $2.865 37.77 41.70 $3.936 46.87 50.32 $3.458 60.63 68.08 $7.45

10 74.39 85.84 $11.4512 88.15 103.60 $15.4514 106.63 126.06 $19.43

Best Practices CIPMeter 5/8 & 3/4" Percent of Bills 82.9%

IN 1,000 GA Existing Proposed $ Change 0 $9.97 $11.56 $1.591 9.97 11.79 $1.822 14.70 16.91 $2.213 14.70 17.41 $2.714 31.85 36.32 $4.475 37.77 43.63 $5.866 46.87 52.74 $5.878 60.63 71.54 $10.91

10 74.39 90.34 $15.9512 88.15 109.14 $20.9914 106.63 132.66 $26.03

This rate class threeyear average gallonsper month is 6,000

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

Minimum HSR CIPMeter 5/8 & 3/4" Percent of Bills 47.2%

IN 1,000 GA Existing Proposed $ Change 0 $12.81 $18.91 $6.101 16.77 24.91 $8.142 20.73 30.91 $10.183 27.26 39.00 $11.744 33.79 47.09 $13.305 40.32 55.18 $14.866 46.85 63.27 $16.42

10 72.97 95.63 $22.6615 105.62 136.08 $30.4620 138.27 176.53 $38.2625 170.92 216.98 $46.06

Minimum HSR Plus Selective Investments CIPMeter 5/8 & 3/4" Percent of Bills 47.2%

IN 1,000 GA Existing Proposed $ Change 0 $12.81 $19.50 $6.691 16.77 26.13 $9.362 20.73 32.76 $12.033 27.26 41.10 $13.844 33.79 49.44 $15.655 40.32 57.78 $17.466 46.85 66.12 $19.27

10 72.97 99.48 $26.5115 105.62 141.18 $35.5620 138.27 182.88 $44.6125 170.92 224.58 $53.66

Best Practices CIPMeter 5/8 & 3/4" Percent of Bills 47.2%

IN 1,000 GA Existing Proposed $ Change 0 $12.81 $19.53 $6.721 16.77 26.71 $9.942 20.73 33.89 $13.163 27.26 42.68 $15.424 33.79 51.47 $17.685 40.32 60.26 $19.946 46.85 69.05 $22.20

10 72.97 104.21 $31.2415 105.62 148.16 $42.5420 138.27 192.11 $53.8425 170.92 236.06 $65.14

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Proposed 2011Proposed 2011 Commercial Monthly Water & Wastewater Bill Commercial Monthly Water & Wastewater Bill

Minimum HSR CIPMeter 5/8 & 3/4" Percent of Bills 40.2%

IN 1,000 GA Existing Proposed $ Change ` $26.51 $26.51 $0.001 26.51 30.26 $3.752 26.51 34.01 $7.503 30.48 40.56 $10.084 37.37 49.01 $11.645 44.26 57.46 $13.206 51.15 65.91 $14.767 58.04 74.36 $16.328 64.93 82.81 $17.889 71.82 91.26 $19.44

10 78.71 99.71 $21.00

Minimum HSR Plus Selective Investments CIPMeter 5/8 & 3/4" Percent of Bills 40.2%

IN 1,000 GA Existing Proposed $ Change 0 $26.51 $26.51 $0.001 26.51 31.11 $4.602 26.51 35.71 $9.203 30.48 43.11 $12.634 37.37 51.76 $14.395 44.26 60.41 $16.156 51.15 69.06 $17.917 58.04 77.71 $19.678 64.93 86.36 $21.439 71.82 95.01 $23.19

10 78.71 103.66 $24.95

Best Practices CIPMeter 5/8 & 3/4" Percent of Bills 40.2%

IN 1,000 GA Existing Proposed $ Change 0 $26.51 $26.51 $0.001 26.51 31.87 $5.362 26.51 37.23 $10.723 30.48 45.01 $14.534 37.37 54.10 $16.735 44.26 63.19 $18.936 51.15 72.28 $21.137 58.04 81.37 $23.338 64.93 90.46 $25.539 71.82 99.55 $27.7310 78.71 108.64 $29.93

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Water & Wastewater Rate Comparison Single Family 3,000 Gallons

5/8 & 3/4 Inch Meters

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Water & Wastewater Rate Comparison Single Family 6,000 Gallons

5/8 & 3/4 Inch Meters

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Water & Wastewater Rate Comparison Single Family 10,000 Gallons

5/8 & 3/4 Inch Meters

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

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Water & Wastewater Rate Comparison Commercial 10,000 Gallons

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Recommendations

Set rates at Best Practices CIP rates to ensure long term health and sustainability of the system

Set all non-city rates at cost of service Implement Water & Wastewater rate adjustment

June 1st

Change annual automatic rate increase to be based on PPI, not to exceed annual CPI plus population index, in compliance with Proposition 1

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Comparison of Regional CPI vs. PPI

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2004 PRJ CPI

Actual CPI &PRJ

PPI All Comm.

Houston Regional CPI & PPI In Percentages

Abbreviations: “PPI” - Producer Price Index all commodities

Ann

ual P

erce

ntag

e

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Addendum – Other Rates