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Task II. Cost of Service Rate Model and Scenario Development <br />Task II will be the bulk of our financial analysis, during which we will identify revenue requirements, <br />analyze cost of service, and develop rate design alternatives for the water, recycled water, and sewer <br />systems, as well as evaluate the City's miscellaneous fees, assess service levels, and conduct <br />benchmarking/surveying. <br />Task Il.a - Revenue Requirements <br />We use our revenue sufficiency and financial planning module to develop a 10 -year financial <br />management plan for both enterprise funds, including projected annual revenue requirements and rate <br />adjustments. This module allows examination of historical operating expenses, growth and <br />consumption trends, alternative capital improvement spending levels, debt service coverage ratios, <br />levels of operating and capital reserves, and other financial policies/goals that affect the revenue <br />requirements of the funds. <br />Demand Projections. In addition to evaluating financial goals and objectives, we will also evaluate <br />alternative demand projections, cost escalation factors, changes in usage patterns, elasticity of <br />customer demand in response to rate increases, and other variables that could affect the financial <br />performance of the enterprises, including separately identifying portions of the utility system revenues <br />that fund utility system operating costs. <br />One item of particular importance is the projection of volumetric sales. Water use patterns are <br />influenced by price signals, and change in customer behavior can also be affected by other non -price <br />factors, such as rainfall (as evidenced by the recent drought), conservation programs (as evidenced by <br />reactions to the Governor's drought declaration in 2015), and economic conditions (as evidenced by the <br />recent recession). We will analyze probable ranges of demand changes in response to different <br />degrees of rate increases, weather patterns, rate structure changes, etc. <br />Capital Spending Scenarios. Our tools are <br />particularly adept and showing the rate <br />impact of comparative capital spending <br />scenarios. Our team is equally adept at <br />examining the age and condition of your <br />system to understand whether the currently <br />level of capital spending is sufficient to keep <br />pace with the depreciation of the system's <br />assets. We will work with staff to develop a <br />series of comparative capital spending <br />scenarios that can be presented to <br />stakeholders for consideration. <br />Funding Plan. For all scenarios reviewed, the financial planning module will develop a funding plan, <br />including the identification of the amount, timing, and type of borrowing required as may be necessary <br />(debt scenarios). We will examine each enterprise fund's use of debt financing for capital improvements <br />and assess the impact of current levels of debt financing, as well as building a financing scenario to <br />support the City in maintaining a proper balance for debt coverage and rate stabilization overthe study <br />period. <br />Ofty d Santa Ana, Calil mia I Water and Sewer Enterprise Cost of Service Study <br />25B-27 <br />StaNec 8 <br />