65B - PROPOSED WATER AND SEWER RATE ADJ

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City of Santa Ana, CA I SEWER RATE STUDY SCOPE OF WORK The City retained Black & Veatch to develop a multi -year financial plan, conduct a cost of service analysis and design rates for both of its enterprises. Presented herein are the results of a study of the projected revenues, revenue requirements, costs of service, and rates for sewer service. For purposes of this report, the study period is the five fiscal years beginning July 1, 2014 and ending June 30, 2019. Based on Proposition 218, agencies may not set rates in excess of 5 -year increments. Unless otherwise noted, references in this report to a specific year are for the City's year ending June 30. To avoid confusion between calendar and fiscal years, the term FY refers to the year beginning July 1 and ending June 30. Black & Veatch has projected revenues and revenue requirements for the study period based on a review of historical factors and the each enterprise's operating and capital budgets and financial policies. The study of revenue requirements recognizes projected operation and maintenance (0 &M) expense, establishment and /or maintenance of reserve funds, and capital financing requirements. Capital financing requirements include payments on outstanding bond issues as well as capital improvement expenditures met from annual revenues and available reserve funds. The Sewer Enterprise's cost of service used the Water Environment Federation (WEF) Manual of Practice No. (MOP) 27. This allocation methodology produces cost of service allocations recognizing the projected customer service requirements for the City. Black & Veatch designed the proposed rates in accordance with cost of service and local policy considerations. In addition, Black & Veatch also evaluated the extent to which the existing rate structure recovers revenues from customer classes in accordance with cost of service allocations. OVERVIEW OF LEGAL AND INDUSTRY BEST PRACTICES FOR COST -OF- SERVICE STUDIES Rate - setting procedures in California require that agencies responsible for imposing property - related charges must demonstrate a nexus between the cost of providing services and the services or benefits received. The state of California considers water and wastewater services as property - related fees and as such, subject to state constitutional and statutory requirements. Presented in the next few sections are brief summaries of the relevant laws governing this study. Proposition 13 Government Code Section §50076, adopted in 1979 provides that "special taxes shall not include any fee which does not exceed the reasonable cost of providing the service or regulatory activity for which the fee is charged." Proposition 218 California voters approved Proposition 218 in November 1996. This voter - approved initiative added Articles XIIIC and D to the California Constitution. Article MID Section 2(e), is a definition of a "fee ". Essentially, as defined by Proposition 218, a fee is "any levy other than an ad valorem tax, a special tax, or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership, including a userfee or charge fora property related service ". Until 2006, sewer charges were considered property related services while water charge were not defined as property - related until the 2006 California Supreme Court decision in Bighorn- Desert View Water Agency v. Verjil. After this decision, water charges are now considered as property - related fees and any new or increased water BLACK & VEATCH I Introduction 65B -178 19