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Agenda 06/10/2014 Item #11C 6/10/2014 11.C. n EXECUTIVE SUMMARY Recommendation to approve the water, wastewater, irrigation quality water and bulk potable water rate study and direct the County Manager or designee to prepare a rate resolution to bring back to the Collier County Board of Commissioners for approval to advertise. OBJECTIVE: Approve the water, wastewater, irrigation quality (IQ)water and bulk potable water rate study, and direct the County Manager or designee to prepare a rate resolution to bring back to the Collier County Board of Commissioners(Board)for approval to advertise. CONSIDERATIONS: Water, wastewater and IQ water user rates and other miscellaneous revenue are used to recover system operation, repair, maintenance, capital improvements for upgrades, replacements, expansions and debt service costs as required by bond covenants from residential and non-residential property owner system users within the boundaries of the Collier County Water-Sewer District(District)utility system(System). In developing the rate studies,the following criteria were used as guiding principles: 1. The user rate should be sufficient to recover the costs of providing service. The cost of service includes System operating costs and debt service along with the accrual of funds for working capital and for pay-as-you-go capital financing that is anticipated in future years. 2. The user rates should maintain the overall financial creditworthiness of the System including maintaining adequate reserves, compliance with rate covenants and maintaining a strong financial position consistent with performance criteria used by rating agencies. 3. Rates should promote the continued conservation of water resources. 4. Proposed rates should be competitive with those of other Florida utility systems. Public Resource Management Group (PRMG), the user rate study consultant, has recommended water,wastewater,IQ and bulk potable water rate increases primarily to enable the District to: 1. Address critical infrastructure rehabilitation needs, 2. Remain in compliance with all regulatory agency rules and regulations, 3. Maintain adequate debt coverage ratios in accordance with rating agency guidelines, and 4. Maintain the sustainability of the utility given recent and anticipated increases in the costs to provide service (e.g. increased System repair costs, increases due to inflation,etc.). On July 27,2010,the Board adopted Resolution 2010-158,Item 8A,which included a 2.7 percent rate increase for water and wastewater user rates effective for FY2011. On February 8,2011, Item 8A,the Board approved Resolution 2011-30 which increased IQ water user rates by 4.5 percent each year for FY2012 and FY2013. That same resolution included no water and wastewater user rate increases for either FY2012 or FY2013 based upon recommendations from PRMG in the water and wastewater 2011 rate study. Further, the Board approved the FY2014 District budget with no rate increase for FY2014. Thus, water and wastewater user rates have remained unchanged for the last three fiscal years. Packet Page-349- 6/10/2014 11.C. On February 8, 2011,Item 8C,the Board approved Resolution 2011-31 which increased the Bulk Potable Services water rates within the Hammock Bay Service Area from$3.31 per 1,000 gallons to $3.54 per 1,000 gallons for FY2012 and to $3.64 per 1,000 gallons for FY2013. There have been no bulk potable water rate increases since FY2013. The attached Water, Wastewater, IQ Water and Bulk Potable Water User Rate Studies were completed by PRMG to evaluate the sufficiency of the user rate revenues to recover the costs of providing service. User rates for water and wastewater service were prepared in coordination with the 2014 Water, Wastewater and Irrigation Quality Water Master Plans, which will be brought to the Board at a subsequent meeting. For FY2015, PRMG is proposing an across-the- board 9 percent increase for water,wastewater and IQ water user rates. For customers with water and wastewater service, this is equivalent to a monthly increase of $7.48 for an average residential utility customer with a 3/4-inch meter using six-thousand gallons of water. The proposed water and wastewater rates for FY2015 would increase the utility bill for such customers from $83.05 to $90.53, approximately four percent below the surveyed Florida utilities' average of$93.96. Since the last rate increase that became effective on October 1,2010, the Consumer Price Index has increased an average of 2.2% each year despite the economic downturn. If a 2.2% increase each year had been applied when there had been no rate increases, the water and wastewater rates recommended for FY2015 would be the same as applying a one- time 9%rate increase. For both FY2016 and FY2017, PRMG is proposing across-the-board 5 percent increases for water,wastewater and IQ water user rates. FISCAL IMPACT: The additional rate revenue anticipated to be generated by the recommended water and wastewater fees over the next three(3)years is: Water = $21,066,500 Wastewater = $24,376,100 IQ Water = $ 1.239,500 $46,682,100 The impact to a single-family residential user of both water and wastewater services with a 3/4- inch water meter can be estimated from the following charts: Packet Page-350- 6/10/2014 11.C. Individually Metered Monthly Residential Customer Impact under Proposed Water Rates Usage(Gallons) 0 2,000 6,000 8,000 10,000 20,000 50,000 Existing Rates $17.63 $22.47 $33.37 $40.65 $47.93 $96.33 $301.83 FY 2015 Rates $19.22 $24.50 $36.39 $44.33 $52.27 $105.07 $328.97 Difference$ $1.59 $2.03 $3.02 $3.68 $4.34 $8.74 $27.14 Difference% 9.02% 9.03% 9.05% 9.05% 9.05% 9.07% 8.99% FY 2016 Rates $20.18 $25.72 $38.20 $46.54 $54.88 $110.28 $345.48 Difference$ $0.96 $1.22 $1.81 $2.21 $2.61 $5.21 $16.51 Difference% 4.99% 4.98% 4.97% 4.99% 4.99% 4.96% 5.02% FY 2017 Rates $21.19 $27.01 $40.12 $48.88 $57.64 $115.84 $362.94 Difference$ $1.01 $1.29 $1.92 $2.34 $2.76 $5.56 $17.46 Difference% 5.00% 5.02% 5.03% 5.03% 5.03% 5.04% 5.05% Individually Metered Monthly Residential Customer Impact under Proposed Wastewater Rates Usage(Gallons) 0 2,000 6,000 8,000 10,000 20,000 50,000 Existing Rates $26.94 $34.52 $49.68 $57.26 $64.84 $83.79 $83.79 FY 2015 Rates $29.36 $37.62 $54.14 $62.40 $70.66 $91.31 $91.31 Difference$ $2.42 $3.10 $4.46 $5.14 $5.82 $7.52 $7.52 Difference% 8.98% 8.98% 8.98% 8.98% 8.98% 8.97% 8.97% FY 2016 Rates $30.83 $39.51 $56.87 $65.55 $74.23 $95.93 $95.93 Difference$ $1.47 $1.89 $2.73 $3.15 $3.57 $4.62 $4.62 Difference% 5.01% 5.02% 5.04% 5.05% 5.05% 5.06% 5.06% FY 2017 Rates $32.37 $41.49 $59.73 $68.85 $77.97 $100.77 $100.77 Difference$ $1.54 $1.98 $2.86 $3.30 $3.74 $4.84 $4.84 Difference% 5.00% 5.01% 5.03% 5.03% 5.04% 5.05% 5.05% It is also recommended that a price indexing clause in the rate ordinance or resolution be adopted to enable the utility to automatically adjust monthly rates for water, wastewater and IQ service without a formal hearing or analysis for inflationary effects on the costs of operations. The annual index adjustment would be calculated by applying one hundred percent of the percentage change in the Miami-Fort Lauderdale Consumer Price Index(all urban consumers)as reported by the Bureau of Labor Statistics from January 1st through December 31st of the previous calendar year to the monthly base charges and usage charges, but not less than 0 percent. The first annual indexing adjustment is recommended to be implemented for FY2018 (on October 1, 2017) unless superseded by another rate study recommendation. Packet Page-351- 6/10/2014 11.C. As set forth in PRMG's Executive Summary, the consultant recommends the bulk water service rate for Hammock Bay service area be increased from $3.64 per 1,000 gallons to $3.75 per 1,000 gallons effective October 1,2014. Effective October 1, 2015,the consultant recommends that the bulk rate be increased to $3.82 and, effective October 1, 2016, the consultant recommends that the bulk rate be increased to $3.85. LEGAL CONSIDERATIONS: This item is approved as to form and legality, and requires majority vote for Board approval.—SRT GROWTH MANAGEMENT IMPACT: The proposed water, wastewater and IQ water user rates are designed to provide funding for operation and maintenance, repair and replacement expenditures and debt service costs. These rates also provide funding for water, wastewater and IQ capital improvements identified in the 2014 Water, Wastewater and IQ Water Master Plan which will be presented to the Board at a subsequent meeting. RECOMMENDATION: Approve the water, wastewater, irrigation quality water and bulk potable water rate study, and direct the County Manager or designee to prepare a rate resolution to bring back to the Board for approval to advertise. PREPARED BY: Laura Zautcke, Senior Management and Budget Analyst, Public Utilities Division-Operations Attachments Exhibit 1 —PRMG Letter Exhibit 2—PRMG Executive Summary Exhibit 3—2014 Rate Study (Due to the size of the document, a web link is provided for viewing: 2014 Rate Study. A hard copy is also available at the County Manager's Office.) Packet Page-352- 6/10/2014 11 .C. EXECUTIVE SUl` MARY AND RECOMMENDATIONS Packet Page -353- 6/10/2014 11 .C. EXECUTIVE SUMMARY AND RECOMMENDATIONS The Collier County (the "County") Water-Sewer District (the "District") water, wastewater and irrigation quality (IQ)water system(the "System")provides an essential service 24 hours per day and 365 days per year. The utility operates in a highly-regulated environment. Regulatory agencies for the District include the United States Environmental Protection Agency (EPA), Florida Department of Environmental Protection (FDEP) and South Florida Water Management District(SFWMD). Permits issued to the utility by these regulatory agencies require satisfactory performance. If the utility does not comply with all applicable regulations, the County could possibly face future consent orders or fines from the regulatory agencies. The District System is established as a utility enterprise fund. General accounting policies and prudent utility management recommend that the System have revenues (financial resources) at least equal to the costs of providing services by the System. As such, the County should establish rates sufficient to meet the cost of operating, maintaining, and repairing the system and financing the ongoing capital improvements of the System in order to continue to provide a safe and reliable service to the County's water,wastewater and IQ water customers. Because of the County's need to ensure that utility revenues will be sufficient to meet System operating and capital needs as well as comply with the rate covenant provisions of the utility's current Bond Resolution and outstanding State Revolving Fund (SRF) loans, Public Resources Management Group, Inc. (PRMG) was retained to perform a review of the user rates of the System to evaluate the ability of System revenues to meet operating and capital needs. During the course of the current rate study, the utility administration and PRMG determined that certain guidelines should be followed while evaluating the sufficiency of the user rates. These guidelines included: 1. The user rates should be sufficient to recover the costs of providing service. The cost of service includes System operating costs and debt service along with the accrual of funds for working capital and for pay-as-you-go capital financing that is anticipated in future years. 2. The user rates should maintain the overall financial creditworthiness of the System. This guideline entails the following: a. Maintenance of adequate operating reserves consistent with the County's reserve policies. b. Compliance with the rate covenants outlined in both the Bond Resolution which authorized the issuance of the outstanding senior lien bonds and the existing Loan Agreements with the Florida Department of Environmental Protection (i.e., State Revolving Fund loan program), which are considered as subordinate lien bonds of the System. ES-1 Packet Page-354- 6/10/2014 11.C. c. Maintenance of strong financial position consistent with performance criteria used by rating agencies and the utility industry. 3. The proposed rates should promote the continued conservation of water resources. 4. The proposed user rates should be competitive with those of neighboring utility systems. Based on the assumptions relied upon in the development of the System expenditure requirements and discussions with County staff, PRMG is recommending the following revenue adjustments for the System: Summary of Proposed Water,Wastewater and IQ Water Revenue Adjustments Fiscal Year Ending September 30, Water Wastewater IQ Water Combined Effective Date System System System System October 1,2014 9.00% 9.00% 9.00% 9.00% October 1,2015 5.00% 5.00% 5.00% 5.00% October 1,2016 5.00% 5.00% 5.00% 5.00% October 1,2017 [1] 2.40% 2.40% 2.40% 2.40% October 1,2018 [1] 2.40% 2.40% 2.40% 2.40% [1] The actual adjustment is recommended to be 100%of the change in the Miami- Fort Lauderdale Consumer Price Index(all urban consumers), but not less than 0%. The primary reasons for the identified revenue adjustments are to: 1. Provide sufficient revenues and cash flow to fund the six-year capital improvement program (CIP) of the District. The projects in the CIP are considered by the utility staff to be critical in order to provide long-term reliable and sustainable utility service to System customers. As previously communicated by the utility staff to the Board of County Commissioners, portions of the aging utility asset base have been identified as being at high risk for breakdowns, service interruptions and spills. The multi-year capital program developed by the District and its consulting engineers as part of the master planning process has been structured to mitigate and manage the System risks. Since the CIP is considered by the utility staff to primarily consist of projects representing ongoing renewals and replacements of assets that are reaching the end of their service lives or operational effectiveness, these projects are recognized in the financial forecast as being funded through annual deposits from system revenues to the District's capital-related funds (i.e.,pay-as-you-go funding). This approach provides the District with increased flexibility in the funding of the capital program and promotes rate sustainability. 2. Continue to fund the costs of operations. Since the last time that the water and wastewater user rates were increased for the Fiscal Year 2011, inflation has continued to affect System operating margins. The following table indicates recent inflationary trends as reported by ES-2 Packet Page -355- 6/10/2014 11 .C. the United States Bureau of Labor Statistics, Engineering News-Record and American City and County: Historical Inflationary Trends Historical Annual Compound Growth Rate Items 1-Year Change 5-Year Change 10-Year Change 20-Year Change BUREAU OF LABOR STATISTICS CPI-U.S.City Average 1.10% 2.03% 2.33% 2.39% Electricity-U.S.City Average 3.84% 1.19% 3.91% 2.49% Fuel Oil-U.S.City Average 2.94% 11.71% 10.86% 7.92% Water and Sewerage Maintenance Index-U.S.City Average 3.64% 5.96% 5.80% 4.58% ENGINEERING NEWS-RECORD Construction Cost Index 2.80% 2.71% 3.34% 2.99% AMERICAN CITY AND COUNTY Municipal Cost Index 2.11% 2.71% 3.24% 2.71% The costs of operations are projected to continue to increase during the Forecast Period due to, among other things,the following: a. Inflationary effects on the costs of electricity, chemicals, fuel and other major expenditures for the utility; b. Labor costs, including incremental increases in staffing as a result of System growth and the capital program identified by the District; c. Increased costs due to regulatory requirements from the EPA, FDEP and SFWMD; and d. Economic recovery has increased bid prices on contractual services (e.g., more competition for limited resources). 3. Continue to fund the District's payment-in-lieu-of-taxes (PILT)to the General Fund. Since the last user rate study, the County changed its transfer methodology from one based on utility assets (e.g., property tax equivalent) to the current transfer policy of 5% of gross receipts. This policy change has resulted in a higher PILT than what was projected in the user rate study completed in 2011 (the "2011 Rate Study"), as shown in the following table: Fiscal Year 2014 PILT: Comparison of 2011 Rate Study Projections veith Actual Results 2011 Rate Study Description Projections Actual Difference Payment-In-Lieu-of-Taxes(PILT) $4,205,700 $5,121,300 $915,600 PRMG has assumed that the current policy would remain in effect throughout the Forecast Period. 4. Maintain compliance with System rate covenants which include debt service coverage margins and the maintenance of certain funds and accounts. ES-3 Packet Page-356- 6/10/2014 11 .C. 5. Maintain adequate operating reserves and margins consistent with County policies to ensure the continued creditworthiness of the System and to provide funds for emergencies (e.g.,hurricane preparedness)and other purposes. 6. Offset the loss of Allowance for Funds Prudently Invested (AFPI) fees that were charged on a per Equivalent Residential Connection (ERC) basis to new growth. These fees, which were first adopted in 2006, recovered the carrying cost for "holding" capacity until it is reserved by development. The County stopped collecting these fees in Fiscal Year 2013 due to a sunset provision in the rate ordinance authorizing the fees, and it was assumed that the fees would not be reinstated during the forecast period. During the Fiscal Year 2012, the last full year of AFPI fee collections,the District collected$1,829,186 in AFPI revenue. The rate study completed in 2011 assumed that collection of these fees would continue. The financial evaluation contained in this study included the six fiscal year period ending September 30, 2019 (the "Forecast Period"). The existing and proposed monthly water, wastewater and IQ user rates are shown in Tables ES-1, ES-2 and ES-3, respectively, at the end of this section. Table ES-4 at the end of this section provides a financial overview of forecasted System operations. This table indicates the following for all projected fiscal years: 1. Overall annual debt service coverage [net revenues divided by the annual debt service requirement(senior lien)] of at least 150% after the Fiscal Year 2014. As discussed herein, and based on bond rating agencies, a financial target for the debt service coverage ratio of 150% is recommended. According to the Utility Revenue Bond Rating Guidelines published by Fitch Ratings(a rating agency which evaluates creditworthiness): "For utilities in the most stable operating environments with a suitably diverse and healthy service area economy, I.5x annual coverage, with consistently maintained unrestricted financial liquidity of at least 90 days of operating revenues, could be sufficient for AA-'or higher ratings. For utilities with substantial growth, compliance demands, or significant annual volatility in revenues or expenditures, greater financial flexibility may be necessary." The District's utility system is currently rated AA+with a positive outlook. 2. Maintenance of adequate operating reserves consistent with levels recognized in the County's reserve policies. 3. Full utilization of internal funding sources (e.g., operating reserves, capacity charge collections)as the first or primary source of capital before use of external debt financing to fund the System capital improvement program. Based on the assumptions relied upon in the preparation of the financial forecast, the utility should remain in good financial position throughout the Forecast Period identified in this report. ES-4 Packet Page-357- 6/10/2014 11 .C. FINDINGS, CONCLUSIONS AND RECOMMENDATIONS Based on our studies, assumptions, considerations, and analyses, PRMG offers the following observations and opinions for consideration by the Board of County Commissioners: 1. The District's water and wastewater user rates have not been adjusted since the Fiscal Year 2011. 2. The District's existing monthly user rates for water, wastewater and IQ water service are not anticipated to recover the District's projected water, wastewater and IQ water revenue requirements for the fiscal years ending September 30,2014 through 2019. 3. The County should consider adopting the Fiscal Years 2015 through 2017 water, wastewater and IQ water system user rate adjustments as outlined in this report. These adjustments are anticipated to generate the following increases in revenue: Estimated Increase in System Revenue Water Wastewater IQ Water Combined Effective Date System System System System October 1,2014 9.00% 9.00% 9.00% 9.00% October 1, 2015 5.00% 5.00% 5.00% 5.00% October 1, 2016 5.00% 5.00% 5.00% 5.00% 4. The County should consider adopting a price indexing rate adjustment clause in its existing rate ordinance to enable the utility to automatically adjust monthly rates for water, wastewater and IQ water service — without a formal rate hearing or analysis — for inflationary effects on the costs of operations. Based on discussions with County staff, PRMG recommends that the annual index adjustment be calculated by applying one- hundred-percent(100%) of the percentage change in the Miami-Fort Lauderdale Consumer Price Index (all urban consumers) as reported by the Bureau of Labor Statistics from January 1st through December 31st of the previous calendar year to the monthly base charges and consumption/volumetric charges, but not less than 0%. Although the District performs rate studies on a regular basis,having a price indexing rate adjustment clause may benefit the District when its senior lien revenue bonds (new or already-issued) are reviewed by bond rating agencies. Such a clause would help to assure the rating agencies that the District's rates would keep up with inflation and, hence, there would be less implied risk that the District would default on any debt service payments. The first annual indexing adjustment is recommended to be implemented on October 1, 2017 unless superseded by another rate study recommendation. Such price indexing rate adjustment clauses are common among utilities in the State of Florida. 5. The proposed water and wastewater user rates for the Fiscal Year 2015 are comparable with the rates charged by "neighboring" utility systems. At an average monthly usage level ES-5 Packet Page-358- 6/10/2014 11.C. of 6,000 gallons, the typical usage of a single family residential customer of the System, bills for combined water and wastewater service under the proposed rates are lower than the average bill charged by eighteen surveyed utilities for similar service. Moreover, at least twelve of the eighteen surveyed utilities: i) are involved in a rate study; ii) are planning to conduct a rate study; or iii)plan to implement a rate revision within the next twelve months. This comparison is shown in Figure ES-1 at the end of this section. As shown in Figure ES-1,the increase in the monthly bill for a user of 6,000 gallons under the proposed rates would be $7.48. 6. The proposed IQ water user rates for the Fiscal Year 2015 are comparable with the rates charged by "neighboring" utility systems. 7. The District should consider increasing the wholesale or bulk water service rate to $3.75 per 1,000 gallons effective October 1, 2014, $3.82 per 1,000 gallons effective October 1, 2015 and $3.85 per 1,000 gallons effective October 1, 2016. 8. The County is currently securing major user agreements reflecting revised take-or-pay IQ water allocations with its major users. The revised IQ water allocations become effective October 1, 2015 (next year). PRMG recommends that the District consider performing an IQ water rate study next year to possibly redesign the IQ water rates for each customer class based on cost of service principles. ^ 9. The utility is currently performing an audit of its fire protection system. Once the audit results are finalized, PRMG recommends that the District consider a review of its fire protection charges. 10. The actual results achieved during the Forecast Period reflected in this report may vary from those projected, and such variations may be material. For example: a. Actual customer growth and usage may be higher or lower than projected. b. The District's capital needs may be higher or lower than those projected and assumed in this report. c. The cost of goods and services (e.g., fuel and oil-based products) may be higher than projected which may directly affect the operating margins of the utility and the long- term ability to fund capital improvements. PRMG recommends that the District reevaluate the sufficiency of its water,wastewater and IQ water user rates on at least an annual basis to reconcile actual results with those projected herein and to validate the overall financial forecast for ongoing strategic planning purposes. 11. The proposed rates, when implemented as assumed in this report, are anticipated to be sufficient to meet the rate covenants of the Bond Resolution and Florida Department of Environmental Protection loan agreements. ES-6 Packet Page -359- 6/10/2014 11.C. The ability of the System to meet the debt service requirements and comply with the rate covenants of the Bond Resolution which authorized the issuance of the outstanding System debt is subject to assumptions and considerations identified in this report and information obtained during preparation of the report regarding the System. 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Item Summary: Recommendation to approve the water, wastewater, irrigation quality water and bulk potable water rate study and direct the County Manager or designee to prepare a rate resolution to bring back to the Collier County Board of Commissioners for approval to advertise. Meeting Date: 6/10/2014 Prepared By Name: ZautckeLaura Title: Management/Budget Analyst, Senior,Utilities Finance Operations 5/16/2014 12:08:59 PM Approved By Name: Steve Messner Title: Director-Water, Water Date: 5/16/2014 4:19:09 PM Name: JacobsSusan Title: Operations Analyst,Public Utilities Division Date: 5/19/2014 1:53:01 PM Name: Joseph Bellone Title: Director-Operations Support,Utilities Finance Operations Date: 5/22/2014 10:40:41 AM Name: ChmelikTom Title: Director-Public Utilities Engineering,Public Utilities Engineering Date: 5/22/2014 2:52:38 PM Name: JohnssenBeth Title: Director-Wastewater, Wastewater Date: 5/22/2014 3:10:07 PM Name: YilmazGeorge Title: Administrator-Public Utilities, Public Utilities Division Packet Page-368- 6/10/2014 11 .C. Date: 5/27/2014 12:45:36 PM Name: TeachScott Title: Deputy County Attorney, County Attorney Date: 5/28/2014 2:05:27 PM Name: KlatzkowJeff Title: County Attorney, Date: 5/28/2014 4:03:55 PM Name: FinnEd Title: Management/Budget Analyst, Senior,Transportation Engineering&Construction Management Date: 6/2/2014 9:52:11 AM Name: OchsLeo Title: County Manager, County Managers Office Date: 6/2/2014 11:59:08 AM Packet Page -369- 6/1 0/2 0 14 1 1 .C. ' '-' -- _ '''-'''''''' - -'''''''''''""""m-" '''''''''' ''''''''''-''''''---''''''''-.'-'--- - -''''-----'- ,' e ,,„.,,,„,...,. k , . 111 P'. '''' 14 0 ^. .... ■ ° Fiscal Year 2014 A , WATER WASTEWATER IRRIGATION QUALITY WATER, AND BULK POTABLE WATER ,..... USER RATE STUDY Ji For ' COLLIER COUNTY _ 1 J, WATER—SEWER DISTRICT 4 , ; X ,,, 4 May 21, 2014 c . PR Public Resources Management Group,Inc. , /IF Utility, Rate, Financial and Management Consultants . Packet Page -370- 6/10/2014 11.C. Public Resources Management Group,Inc. Utility, Rate, Financial and Management Consultants May 21, 2014 Honorable Chairman and Members of the Board of County Commissioners Collier County 3299 Tamiami Trail East, Suite 303 Naples,FL 34112 Subject: Water, Wastewater, Irrigation Quality Water, and Bulk Potable Water User Rate Study for Collier County Water-Sewer District Ladies and Gentlemen: Public Resources Management Group, Inc. (PRMG) has completed our review of the water, wastewater, irrigation quality (IQ) water and bulk potable water user rates for the Collier County (the "County") Water-Sewer District (the "District") utility system (the "System"), and has summarized the results of our analyses, assumptions, and conclusions in this report which is submitted for your consideration. The analysis encompassed a financial evaluation of the operations and expenditure needs of the System for the six fiscal year period of October 1, 2013 through September 30, 2019 (the "Forecast Period") and the evaluation of the sufficiency of the user rate revenues to meet such needs. Based on the assumptions relied upon in the development of the System expenditure requirements and discussions with County staff, PRMG is recommending water, wastewater and IQ water user rate adjustments for the System. The water and wastewater user rates have not been increased since Fiscal Year 2011. Since that time, System operating expenses have increased due to System repair/maintenance expenditures and inflation. The user rate adjustments are primarily needed to enable the District to: i) address critical infrastructure rehabilitation needs; and ii) maintain the sustainability of the utility given recent and anticipated increases in the costs to provide service (e.g., increased System repair costs, increases due to regulatory requirements, increases due to inflation, etc.). As previously communicated by the utility staff to the Board of County Commissioners, portions of the aging utility asset base have been identified as being at high risk for breakdowns, service interruptions and spills. The multi-year capital program developed by the District and its consulting engineers as part of the master planning process has been structured to mitigate and manage the System risks. The District's user rates are anticipated to remain competitive with the rates of neighboring utility systems throughout the Forecast Period. It recommended that the County reevaluate the sufficiency of the District's user rates on an ongoing basis. Following this letter, we have provided an executive summary which briefly summarizes the results of our study and outlines K:\1125-31\\Report\User Rate Report\FY 2014 User Rate Report.doc 341 NORTH MAITLAND AVENUE- SUITE 300-MAITLAND,FL 32751 TELEPHONE: (4 07)628-2600 ° FA X: (4071628-2610 • EMAIL: PRMG @PRMGinc.coln Packet Page-371- 6/10/2014 11 .C. Honorable Chairman and Members of the Board of County Commissioners Collier County May 21, 2014 Page 2 our recommendations and conclusions. The accompanying sections of the report provide additional details regarding the rate and financial analysis conducted on behalf of the District. We appreciate the opportunity to be of service to the County and would like to thank the County staff for their assistance and cooperation during the course of this study. Respectfully submitted, Public Resources Management Group,Inc. 0O-t—.4-1 - Robert J. Ori President Bryan A. Mantz, CMC, CGFM Supervising Consultant Packet Page -372-