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Page 2 of 5 RECOMMENDATION 1. Receive presentation on the water drought rates and connection fee study. 2. Accept staff recommendation for drought rates to provide an 8 ccf per bill allotment to all customers. 3. Accept staff recommendation for connection fees to be calculated based on the hybrid method. BACKGROUND The City is a water retailer that operates and maintains a water distribution system to deliver water to City residents and businesses for domestic, commercial, irrigation, firefighting and other uses. Zone 7 Water Agency (Zone 7) is the Tri-Valley’s water wholesaler. It procures water from the California Department of Water Resources (DWR) and produces water from its regional wells, which it sells to the City and other Tri-Valley water retailers for distribution. Since November 2022, the City has been receiving 100 percent of its water supply from Zone 7 due to the City Council electing to discontinue the use of the City’s groundwater supply wells because of the presence of per- and polyfluoroalkyl substances (PFAS) at concentrations above upcoming regulatory requirements. In 2023, the City Council approved a two-year water rate increase of 30 percent effective January 2024 and 12 percent effective January 2025 to maintain adequate funding for short- term operations and maintenance of the water system and to replenish the reserves to City Council-approved levels. In 2024, the City Council approved the Water System Management Plan (WSMP), which identified a 20-year Capital Improvement Program (CIP) and long-term operations and maintenance strategies. The WSMP serves as the foundation for identifying the financial needs of the water program moving forward. In 2024, the City contracted with WRE to perform water rate and connection fee studies with the goal of establishing cost-based and legally defensible rates and connection fees to support the long-term financial sustainability of the City’s water program. New water rates and connection fees are anticipated to become effective on January 1, 2026. To recommend new water rates, the City is following a multiple-step process that complies with Proposition 218 and industry best practices. In March 2025, the City Council approved a water system financial plan prepared by WRE, which included implementing an enhanced CIP delivery model from the WSMP. The financial plan recommended revenue increases of 15 percent for the first two years and 8 percent for the following two years, and issuing $35 million of debt to fund near-term capital improvements. In May 2025, WRE performed a rate design analysis to allocate the revenue requirements determined as part of the financial plan among the different customer classes. The recommended rate structure was approved by the City Council at its May 6, 2025 meeting, and included uniform consumption-based variable charges for all customer classes (as opposed to tiered) and Zone 7 fixed costs being 100 percent recovered as pass-through fixed charges to customers (as opposed to a portion of Zone 7 fixed costs recovered as variable charges). The benefits of the selected rate structure are that it is consistent with recent legal rulings related to Proposition 218 and reduces financial risk to the water program in periods of reduced water demand. However, the selected rate structure will have a higher bill impact (in terms of percentage increase) on customers with lower usage. The resulting proposed water rates are included in the attached technical memorandum by WRE. Next steps include presenting the water rate study report and Proposition 218 notice to Page 194 of 226