1. Water Infrastructure Financing:Will the Future be Different?3rd Annual CLE International Water Marketing ConferenceDecember 8, 2011Presenters:David LaFrance, Executive Director AWWA Jason Mumm, President of StepWise

2. Water and SewerBills are BecomingLess Affordable 3. 2000$446 Your Bills$722 2010 4. Between 2000 and 2010, water and sewer billsoutpaced CPI inflation by MORE THAN DOUBLE 5. 62%INCREASEin water and wastewaterutility bills since the year2000 6. DECREASEin household incomebetween 2000 and 20107% 7. Water and sewer bills are already unaffordable for the bottom20% of households when measured against the EPAaffordability criteria 8. Water/Sewer Bill Inflation Normal Inflation Can you Household Income Growth see it now? 200820002001 20022003 20042005 200620072009 Harder Core Data2010 9. That was the pastWhats in our future? 10. Got Infrastructure? 11. LOCAL GOVERNMENTSWill spend over 3 trillion dollars between 2009 and2029 on water and wastewater infrastructure.- US Conference of Mayors, 2010 12. Relative Water InfrastructureConcerns % Coverage of Utility Costs by Funding from Rates &Operations (after Capital needs) 50%% Mentioning 40% |------- 49 % --------| 30% 20% |--- 29 % ---| 10% |------ 22 % -------| 0% than 59% 69%79% 89% 99%119%Less109% 100%120% 101- 50- 60-70- 80- 90- 110- or Source: 2011 AWWA State of the Industry Report 13. Most Public Utilities Are Losing Money Already* % Gain (Loss) per $ of Water Sales Revenue 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0%-10.0%-12.0%-14.0% 500 - 3,300 3,300 - 10,000 10,000 -50,000 -100,000 - > 500,000 50,000 100,000500,000 Size of Utilities by Population Served * EPA 2006 Community Drinking Water Survey, Table 83 14. Annual Cost of Water forResidential Customers Expected Annual Water Cost to Residential CustomersMedian 15%ResidentialWater Bill is% Mentioningabout $350 10% per year 5% 0%$25 $10$15 $20 $30$35 $40 $50$55 >$100 $600+Source: 2011 AWWA State of the Industry Report 15. $350 per year! or is it.95 cents per day? 16. DENVER METRO AREA:Residents use 1.3 tons of water per dayat an average daily cost of $1.22 17. But people are stillconcerned aboutthe cost ofmunicipal waterservice 18. Decreased VolumeSales Add toUtilities Challenges 19. An Example of Decreasing Demand Source: Massachusetts Water Resources Authority Webpage Resource AuthorityMass. Water 20. We purposely try to promote conservation of water in many ways i.e., we PLAN to reduce demand Low-flow fixture rebates Landscape alterationsMetering customer water usageManipulating prices to discourage usage 21. There are also unplanned reasons that causereductions in demand likeweather, climate, and economic conditions. 22. Once reduced, demand often reaches a newnormal at a lower level than beforeYESTERDAYTOMORROWS NEWNORMAL 23. Decreases in demand have to be offset byincreases in price to maintain revenuelevelsBECAUSER=PxQ 24. R=PxQ$10,000$101,000If total costs are $10,000, your revenue isequal to costs and all is well 25. R=PxQ$10,000$10 1,000 700But when demand drops absent change inprice, you are suddenly losing money= ($3,000) Loss! 26. R=PxQ$10,000 $10 1,000$14.28 700 Price has to GO UP to get back to where everything was well and good 27. FROM THE UTILITYS PERSPECTIVE:The rate increase was revenue-neutral and there was noincrease in the cost to serve. 28. FROM THE CUSTOMERS PERSPECTIVE:I JUST GOT A 43% INCREASE IN MY WATERBILL!? 29. But Price Adjustments DontHappen Frequently (enough)Years Since Last Rate Increase 40%% Mentioning 30% 20%24% have not raised rates in over2 years; 13 % in over 5 years 10% 0% >1 1 2 345 67 8 9 10Source: 2011 AWWA State of the Industry Report 30. 49,000 drinking water utilities, andThere are16,000 wastewater treatment systems 31. Over half of them are serving fewer than 500 people.98% of them serve fewer than 100,000 32. ProblemUtilities face a high probability of increasing costswhile also facing decreases in volume sales, andincreased customer resistance to higher rates. 33. Rate SettingConsiderations 34. There is no ONE way to set waterrates, but generally acceptedpractices track cost burdens withservice benefits 35. * That generalmethodology is calledCost-of-Serviceratemaking. * Available at AWWA website 36. Legal Aspects of Rate Setting(Page 1)Ratemaking: Is a policy-making function of the legislative body Must be rationally related to the governmental utility purpose Involves many questions of judgment and discretion Must be reasonably related to the overall cost of the serviceLegislative Bodies: Are not bound by previously used utility methodologies Can establish different rates for each customer class, based upon reasoneddistinctions 37. Legal Aspects of Rate Setting(Page 2)Rate Methodologies: Do NOT require mathematical exactitude Consider a representative level of anticipated revenues and expensesand the property employed by the utility to provide service Projected figures bear a meaningful relation to future as well as past andpresent fiscal realities Cost-of-service may be a factor, it is certainly not the exclusive factorRates May Be Set Aside: If they are not rationally related to a local governmental utility purpose If they are inherently unsound, unjust or contain unreasonablediscrimination However, a court cannot substitute its judgment for that of the rate-making authority or choose between appropriate alternatives 38. Questions 39. Supplemental Slides 40. Bennett Bear Creek Farm Water and Sanitation Dist.v. City and County of Denver By and Through Bd. ofWater Comrs., 928 P.2d 1254 (Colo. 1996) Judicial review must respect the separation of powers and avoid intrudingon the policy-making function of the legislative body. The rate-making entity is not bound by prior utilized utility methodologieswhen it has a reasonable basis, in the exercise of its policy function, toadopt a different methodology. Rates and charges are rationally related to the governmental utilitypurpose, including having additional development pay its own way. The court cannot substitute its judgment for that of the rate- makingauthority or choose between appropriate alternatives. Rates that are not rationally related to a local government utility purposeare subject to being set aside if those challenging the rate carry theirburden of proving lack of such a relationship.Supplemental 41. CF&I Steel, L.P. v. Public Utilities Comn ofState of Colo. 949 P.2d 577, 584 (Colo.1997) Since rate setting is a legislative function which involves many questions ofjudgment and discretion, courts will not set aside the rate methodologieschosen by the PUC unless they are inherently unsound. The Commission is not bound by a previously utilized methodology when ithas a reasonable basis, in the exercise of its legislative function, to adopt adifferent one. Although consumers within the same class of service should be subject tosubstantially similar rates, the PUC may establish different classifications ofservice, and different rates for each class, based upon reasoneddistinctions. Supplemental 42. Krupp v. Breckenridge Sanitation Dist., 19 P.3d687, 693-694 (Colo. 2001).Because a service fee is designed to defray the cost of a particular governmental service, the amount of the fee must be reasonably related to the overall cost of the service.Mathematical exactitude is not required, however, and the particular mode adopted by the governmental entity in assessing the fee is generally a matter of legislative discretion. Absent evidence to the contrary, we presume that the District may rationally distinguish between different types of projects in setting its rates.Supplemental 43. Rates fixed by government authoritiesDiscretion of government body 64 Am. Jur. 2d Public Utilities 96 AmericanJurisprudence, Second Edition Database updated May 2009 Rate-making administrative agencies are not bound to the service of anysingle regulatory formula; they are permitted, unless their statutory authorityotherwise plainly indicates, to make pragmatic adjustments that may becalled for by particular circumstances. In determining fair rates, a public service commission considers arepresentative level of anticipated revenues and expenses and the propertyemployed by the utility to provide service to its customers. The latest available economic information should be utilized by a rate-making body in a rate-making proceeding, in order to insure that projectedfigures bear a meaningful relation to future as well as past and presentfiscal realities. Supplemental 44. Integrated Network Services, Inc. v. Public UtilitiesComn of State of Colo., 875 P.2d 1373, 1383 (Colo.1994).While cost-of-service may be a factor, it is certainly not the exclusive factor to be considered in a ratemaking decision of the PUC. Indeed, if such were the case, the PUC would have little ratemaking discretion; rather, it would become a rubber stamp relegated to examining cost studies of utilities.Supplemental