75A - PH - WATER AND SEWER RATES

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2019 Water, Recycled Water, and Sewer Rate Study Executive Summary This Study used methodologies that are aligned with industry standard practices for rate setting as promulgated by the American Water Works Association (AWWA), the Water Environment Federation (WEF), and all applicable law, including California Constitution Article XIII D, Section 6(b) (for water, recycled water, and sewer rates) commonly known as Proposition 218. This Study consisted of the following phases: 1. Revenue SufficiencyAnalysis (RSA) —The Study developed multi -year financial forecasting models for the City's Water and Sewer Enterprises to determine the level of annual rate revenue required to satisfy projected annual operating costs, debt service expenses, and capital cost requirements while maintaining adequate financial reserves. In the RSA, the Stantec team evaluated the financial requirements of each Enterprise over a 10-year projection period and made recommendations for rate revenue adjustments over a 5-year period. Input data and key assumptions were reviewed with City staff, and several alternative capital spending scenarios were evaluated by staff during the RSA. This process generated a recommended financial plan and corresponding annual rate increases. While our analysis provides 10-year rate revenue increases, it is recommended that they City conduct an updated analysis in the next 2 — 5 years, as many of the assumptions used in this analysis may change in this time period, which may result in over or under collection of revenues from customers. Like many utilities around the state and country, the City's water and sewer utilities are currently facing challenges of aging infrastructure. According to City Staff, the City's infrastructure is generally in good working condition, however, about 20% of the City's water distribution system has already exceeded the theoretical useful life (some of which date back to before the 1930s). This number is expected to jump to 70% by 2040 if no pipe replacements are made. In addition, many of the Water Enterprise's wells, pump stations, and reservoirs have reached the end of their useful service life. The City has completed Water and Sewer Master plans which both recommend a material increase in capital spending to address critical infrastructure repairs. As part of the RSA, multiple capital spending scenarios were considered to balance the need for infrastructure re -investment while limiting the financial impact to utility rate payers. The Study also made recommendation for targeted cash reserves, which is an important component of an enterprise's financial stability and maintaining a strong credit rating. Recommended reserves include an Operating & Maintenance Reserve target equal to 90-days (3 months) of annual operating expenses, an Emergency Reserve set a $4 million (for both the Water and Sewer Enterprises), and a Repair, Renewal, and Replacement (3R) Capital Reserve equal to 50% of average annual projected capital spending. The target levels of the above policies are consistent with 1) the Stantec team's industry experience for similar systems, 2) the findings of reserve studies conducted by the AWWA, and 3) a healthy level of reserves for a municipal utility system per the evaluation criteria published by the municipal utility rating agencies (e.g. Fitch, Moody's, and Standard & Poor's). Due to the different financial needs for the Water and Sewer Enterprises, respectively, this Study is recommending different rate increase schedules for each enterprise. As presented in Table ES-1, rate City of Santa Ana Stantec I ES-2