EPCOR WATER SERVICES INC. 2022-2024 Performance Based Regulation Drainage Application February 16, 2021 EPCOR Water Services Inc. 2022-2024 Drainage Application Table of Contents APPLICATION OVERVIEW ............................................................................................ 1 1.1 Introduction .................................................................................................................... 1 1.2 Applied-For Sanitary and Stormwater Rates .................................................................. 5 1.3 Applied-For Performance Measures ............................................................................... 7 1.4 EWSI Background and Corporate Structure ................................................................... 7 1.5 Forecast Revenue Requirement – Sanitary and Stormwater Utilities ............................ 8 1.6 Proposed Cost of Capital ............................................................................................... 11 1.7 Annual Drainage Rate Setting (2022-2024) .................................................................. 12 1.7.1 Inflation Factor .......................................................................................................... 13 1.7.2 Efficiency Factor ........................................................................................................ 13 1.8 Special Rate Adjustments to Sanitary and Stormwater Rates ...................................... 15 1.8.1 Special Rate Adjustments for Re-Basing ................................................................... 15 1.8.2 Special Rate Adjustment for 90 Day Deferral Program ............................................ 17 1.8.3 Special Rate Adjustments for SIRP and CORe ........................................................... 17 1.9 Customer Bill Impacts ................................................................................................... 18 1.10 Stakeholder Consultation ............................................................................................. 21 1.11 Organization of EWSI’s Drainage PBR Application........................................................ 23 DRAINAGE TRANSFER REVIEW .................................................................................. 25 2.1 Background ................................................................................................................... 27 2.2 Letter of Intent .............................................................................................................. 30 2.3 Current Status of Commitments ................................................................................... 31 2.3.1 Employees ................................................................................................................. 32 2.3.2 Dividend .................................................................................................................... 32 2.3.3 2018-2021 Rates ....................................................................................................... 32 2.3.4 SIRP and CORe Implementation ............................................................................... 32 2.3.5 Transparency ............................................................................................................. 34 2.3.6 Capital Efficiencies .................................................................................................... 34 2.3.7 Operating Efficiencies ............................................................................................... 39 2.3.8 Operating Efficiencies - Financial Reconciliation ...................................................... 40 2.3.9 Future Operating Cost Efficiencies ........................................................................... 46 2.4 Changes Since the Transfer ........................................................................................... 46 2.4.1 Stormwater Revenue ................................................................................................ 46 2.4.2 Stormwater Management Facilities (Wet Ponds) .................................................... 47 2.4.3 Culverts and Ditches ................................................................................................. 48 2.4.4 Neighbourhood Renewal Program ........................................................................... 48 2.4.5 Major System Failures............................................................................................... 49 SYSTEM OVERVIEW AND FUTURE EXPECTATIONS ..................................................... 55 3.1 Drainage System Overview ........................................................................................... 55 3.1.1 System Overview ...................................................................................................... 55 3.1.2 Environmental Regulatory Requirements ................................................................ 61 3.2 EWSI Drainage Services Performance Summary (2018-2021) ..................................... 62 3.2.1 Operating Performance Review (2018-2021) ........................................................... 62 3.2.2 Financial Performance Review (2018-2021) ............................................................. 63 February 16, 2021 i 2022-2024 Drainage Application EPCOR Water Services Inc. 3.3 Future Challenges and Opportunities (2022-2024 and beyond) .................................. 65 3.3.1 City Growth ............................................................................................................... 66 3.3.2 Implementation of SIRP and CORe Strategies .......................................................... 66 3.3.3 Integrated Watershed Management Strategy ......................................................... 67 3.3.4 One Water Planning .................................................................................................. 69 3.3.5 Operational Efficiency Review and Real Estate Consolidation ................................. 70 3.3.6 Drainage Construction Strategy ................................................................................ 72 REVENUE REQUIREMENT SUMMARY ........................................................................ 75 METHODOLOGY AND KEY ASSUMPTIONS ................................................................. 79 5.1 Accounting Policies ....................................................................................................... 79 5.2 Cost Forecasting Process .............................................................................................. 80 5.2.1 Inflation Factor .......................................................................................................... 82 5.2.2 Operating Cost Forecast Process .............................................................................. 83 5.2.3 Capital Cost Forecast Process ................................................................................... 85 5.3 Capital Structure and Cost of Capital ............................................................................ 95 5.3.1 Rate of Return on Equity ........................................................................................... 95 5.3.2 Cost of Debt .............................................................................................................. 97 5.4 Depreciation and Amortization .................................................................................... 98 5.5 Contributions in Aid of Construction .......................................................................... 100 5.5.1 Contributions from Developer-Built Assets ............................................................ 100 5.5.2 Contributions from Sanitary Servicing Strategy Fund (SSSF) .................................. 101 5.5.3 Contributions from Government Grants ................................................................ 101 5.5.4 Other Contributions from Customers ..................................................................... 101 5.6 Capitalized Overhead Methodology ........................................................................... 102 5.7 Inter-Affiliate Transactions Summary ......................................................................... 102 5.8 Drainage Volume and Customer Count Forecast Methodology ................................ 104 5.8.1 Impacts of the COVID-19 Pandemic ........................................................................ 104 5.8.2 Customer Count Forecasting Process ..................................................................... 104 5.8.3 Volume per Customer Forecasting Process ............................................................ 109 5.8.4 Consumption Volume Forecast............................................................................... 112 OPERATING COSTS ................................................................................................. 113 6.1 Operating Costs by Cost Category .............................................................................. 114 6.2 Operating Costs by Function ....................................................................................... 117 6.2.1 Drainage Operations ............................................................................................... 119 6.2.2 One Water Planning and Project Support .............................................................. 123 6.2.3 Operational Support Services ................................................................................