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A Crowe Horvath Mr. Steven Bocian Page 16 December 23, 2013 "The annual return on equity(ROE)is defined as the difference between franchise revenue and allowable franchise expenses. Franchise expenses shall include corporate taxes calculated at prevailing California and Federal tax rates, and shall include expenses and reserves established in accordance with the provisions of Paragraph 19.2(d), (e), (f), and (g)of the Agreement.The ROE shall be determined annually covering a twelve(12)month fiscal year ending each March 31. The minimum and maximum ROE limitations shall be as specified in Paragraph 19.2(e). When the annual ROE is greater than the maximum ROE limitation,the excess revenues over and above the maximum limitations shall be held in a reserve to defray future rate increases.When the resulting annual ROE is less than the minimum ROE limitation, the deficiency in revenues shall be recoverable from future timely rate increases,and/or from reserves(if any)set up to defray future rate increases." The franchise agreement between the City and PGS states that the annual rate of return on equity shall not be less than 8 percent or more than 16 percent of the equity base.The calculation for CY 2013 and CY 2014 is set at 8 percent of the equity base. Imoact(s): • No change to the ROE for CYs 2013 and 2014. 5. Recommended Rate Change PGS has requested a 12.15 percent rate increase effective January 1,2014 to recover a projected$2.74 million revenue gap.This figure is inclusive of: • $0.46 million to recover a$2.55 million 2012 balancing account amortized over 5.5 years • $0.28 million to recover a$1.57 million 2013 balancing account amortized over 5.5 years 3 $1.99 million to recover a projected 2014 revenue gap. Accounting for the aforementioned adjustments, Crowe recommends a 7.80 percent increase as shown in Table 10 below. Table 10 Summary of PGS Requested and Crowe Recommended Rate Change (January 1,2014) PGS Request Crowe Recommendation Deficit 2014 Rate Deficit 2014 Rate (Years to Recovery Increase (Years to Recovery Increase Recover) Amount . Recover) Amount 2012 Actual $2,550,970 $463,813 2.06% $2,550,970 u (5.5 years) (5.5 years) X63,813 2.06/o 2013 Estimated $1,570,367 $285,521 1.27% $1,150,601 $209,200 0.93% (5.5 years) (5.5 years) 2014 Projected $1,987,518 $1,987,518 8.82% $1,082,299 (1,0 years) (1.0 years) $1 082,299 4.81/o Total $6,108,855 $2,736,852, 12.15% $4,783,870 $1,755,312 7.80%