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3 . Cost of Service Analysis This section of the Report describes the COS analysis.The purpose of a COS is to proportionately allocate costs to the various customer classes and tiers based on their cost burden on the water system.Numbers shown in the tables of this section are rounded.Therefore,hand calculations based on the displayed numbers,such as summing or multiplying,may not equal the exact results shown. 3 A- Process and Approach The COS analysis was developed using the principles established by the AWWA's M1 Manual,using the Base- Extra Capacity methodology, and are in line with industry standards and align with legal requirements for water rate-setting(namely,Proposition 218).The Base-Extra Capacity methodology allocates costs consistent with demand patterns of each customer class and for tiered rates,the demand patterns of each tier. The purpose of a COS analysis is to align the annual cost of providing water service with the customer classes and tiers commensurate with their service requirements.A COS analysis involves the following steps: 1. Determine Revenue Requirement: The first step in the COS analysis is determining the adequate and appropriate level of funding for the water utility.This is referred to as determining the"revenue requirement" for the base year,which for this Study is FY 2024.This analysis considers the short-term and long-term service objectives of the water utility over a given planning horizon, including capital facilities, O&M, and financial reserve policies to determine the adequacy of a utility's existing rates to recover its costs. 2. Categorize Costs into System Functions: Utilizing an agency's approved budget,financial reports, operating data,engineering data, and CIP,a rate study generally categorizes(i.e.,f inctionalizes)the operating and capital costs of the water system among major system functions.Examples of system functions include but are not limited to water supply,storage, treatment, pumping, and transmission and distribution. Since the City operates a water distribution system, most of the system costs other than water purchase costs are related to transmission and distribution. 3. Allocate Functionalized Costs to the Appropriate System Cost Components: Cost components represent the major pieces of a water system that the agency incurs specific costs related to,with one or more functions attributable to one or more system components. For example, distribution costs(system function) are allocated to base and maximum hour(cost components)since distribution lines are sized to accommodate maximum day(peak)demands. The City's water system cost components include recycled water,base delivery, maximum day,maximum hour,meter servicing,and customer service. 4. Determine Units of Service and Unit Costs for Cost Components: Each cost component is associated with a specific unit of service;costs within each component are divided by the total units of service to determine the unit cost.For example,customer service costs are associated with the total number of customer accounts. Dividing total annual costs by total customer accounts yields the unit cost of customer service. 5. Distribute Cost Components to Customer Class: The cost of the system,allocated by system component unit costs,are distributed to customer classes and tiers in proportion to their respective demands and burdens on the system using the units of service and unit costs for each component. 32 CITY OF PLEASANTON