Department of Public Utilities

1. Department of Public Utilities Financial Plan and Rate Study Presentation of Study Results August 2006

2. Report Components • Driving factors behind the report • Results of the Rate Study

3. CHESAPEAKE CITY COUNCIL GOALS REVIEWJanuary 18, 2003 Primary responsibility • Rehabilitate water and sewer lines • Secure additional water sources to insure an abundant supply for City residents Unstated support responsibility • Support established neighborhoods by keeping housing and infrastructure up-to-date • Strengthen emergency planning and facilities • Redevelop areas of the City to generate wealth • Maintain good financial management policies and strategies • Protect water resources • Create and implement economic development strategies that insure prosperity

4. It must be self-supporting through its rates and fees • Operating costs are paid via User Fees • Capital costs are funded on - pay as you go basis • - or bonds • Capital costs are paid through a combination of both user fees and • connection fees • It receives nosubsidy from the General Fund (i.e. taxes) • Bond Coverage Ratio (BCR) required by our Master Bond • Resolution to be 1.0 or greater

5. Issue Overview • Bond coverage • Operating costs increased at a much greater rate than CPI • EPA/DEQ regional consent order • CIB Needs • Unserved Areas

6. Bond Coverage Ratio Revenues Expenses • Required by our Master Bond Resolution to be 1.0 or greater • BCR may be greater depending on type of financing • BCR =

7. Average Annual Increase By Expense Drivers (FY2001-2006)

8. Water Distribution Plan

9. Operating costs-Raw Water Purchases • The 2001 Rate Study for the current rates estimated the cost to be $0.60 per 1,000 gallons (Lake Gaston raw water) • Actual cost of water is $1.05 per 1,000 gallons (Norfolk raw water) • $1.2M – $1.5M more per year

10. Operating Costs-Treated Water Purchases FY 2001 –FY2005 • Consumer Price Index from 2001 to 2005 +10% • Portsmouth Unit Price +15% • Norfolk Unit Price +28% Through FY06 and FY07 Portsmouth’s rate will have increased another +9% Norfolk’s rate will have increased another +12%

11. Impact of Purchased Water(Using current Rates) Purchased Sold Net Loss (per CCF) (per CCF) (per CCF) Norfolk Water $3.47* $3.225* ($0.25) Portsmouth Water $3.79* $3.225* ($0.57) *at current water rate

12. Unit Purchase Price vs. Unit Sales Price

13. Other Operating Cost Increases (Consumer Price Index from 2001 to 2005 increased 10%) During this past Fiscal Year Copper tubing (hourly quotes) +276% to +505% Sewer main materials +218% to 361% Water Main materials +147% to 218%

14. How Did Public Utilities Mitigate the Increases ? • Controlled discretionary spending • Controlled CIB projects in spite of needs • Reduced CIB funds for system renewals (routine annual maintenance) • Optimized service areas

15. Operating Expense Breakdown Personnel Water Purchases O & M Controllable O & M Non-Controllable Debt

16. Does Growth Help? • Increased operating costs (meter reading, billing, customer service, maintenance, repairs) • Flat Sales • Does not help as much as one might assume

17. Actual Revenue vs Actual Growth (FY02-06) • Water/Sewer Account Growth +1.62% per FY • Average amount of water people consumed only increased by +0.24% per FY • Previous rate study estimated 2% growth in both categories

18. EPA/DEQ • This is an unfunded mandate on region. • Required by both the State and Federal Governments • Sanitary Sewer Evaluation Survey (SSES) • Potential fiscal impact of the SSES is unknown at this time. • Proposal contains an approximation of the eventual EPA/DEQ impact • Norfolk (SSES $2.8M; CIB 2002-2004 $13.5M; CIB 2004-2008 • $39.4M plus EPA mandated rate increase)

19. CIB Needs Current plan reflects a 5-year $66M CIB to address Infrastructure issues per the Council’s goals • Membrane Replacement • Vehicle replacement • Water System Renewal (routine O&M) • Sewer System Renewal (routine O&M) • Pump Station & Wet Well Upgrade (routine O&M) • Customer Service/Billing software • System Optimization • Storm Hardening • Storage Tank Renovation • Northwest River Water Treatment Plant Cover Replacement • 800 MHz Digital Radio System • Waterline Upgrades (replacement) • Force Main Upgrades (replacement) • Sewer Line Upgrades (replacement) • Water Reliability (New Installations) • 30" NWR Raw Water Main • Raw Water Transmission Main • Greenbrier Tank (New Installations)

20. Unserved Areas • 79 Sewer Projects totaling $74.7M (2005 Dollars) • 44 Water projects $20.4M (2005 Dollars) • This Financial Plan provides $27.0M for Unserved Areas • Best estimate indicates that 10 areas might be served • List prioritized by Chesapeake Department of Health • New Cost Participation Policy

21. Unserved Sewer Areas Identified in 2005 Study

22. Unserved Water Areas Identified in 2005 Study

23. Proposed Ten Unserved Areas SewerWater • Willow Lakes $2.4M $0.9M • Albemarle Acres $5.3M $2.6M • Manning Ct/Vico $1.7M $0.3M • Etheridge Manor (Sect.1) $1.1M - • Battlewood Meadows $4.6M - • Bridgewood $0.8M $0.3M • Old Mill Rd $3.4M - • Cedar $1.7M - • Shipyard Rd $1.2M $0.3M • Waters Rd. $0.4M - (Listed in priority per Chesapeake Health Department)

24. Summary • Operating costs have increased at a higher rate than expected • We have exhausted all options to mitigate the increases • The EPA/DEQ mandate is imminent/mandatory • The bond coverage ratio will be impossible to meet without fiscal help. • An Unserved Areas program is introduced

26. Basic assumptions used in study:

28. Recommendation for Connection Fees

29. Comparison of Connection Fees (5/8” meter)

32. FY 2007 Rate Increase Factors

33. Average Monthly Bill for Water & Sewer Average Monthly Residential Bill

36. FY 2009 Rate Increase Factors

39. FY 2011 Rate Increase Factors

40. What’s Next . . . . . ? August 8, 2006 – Conduct a work session for City Council September 12, 2006 – Conduct a public hearing and request council action November 1, 2006 – Implement revised rates

41. Discussion