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Page 3 of 5 the City Council on July 15, 2025, for acceptance and approval. The proposed water rates will then go through a 60-day public review period, followed by a public hearing on October 7, 2025, for the City Council to adopt rates. DISCUSSION Water Drought Rates Water shortages occur whenever the availability of the water supply cannot meet the normally expected customer water use. As the State’s 2018 Water Conservation legislation requires, the City maintains a Water Shortage Contingency Plan (WSCP), which includes six stages of potential percent water reductions and corresponding response actions. The City Council will determine if a water shortage condition exists and, if needed, adopt a resolution declaring a water shortage emergency and the associated water shortage stage. During a water shortage emergency, customers reduce their usage, reducing the City’s variable revenue. Water drought rates are a consumption-based surcharge that can be implemented during this emergency period to maintain the City’s financial position. Water drought rates are set to recover variable revenue loss from reduced usage, minus the cost savings from reduced variable expenses. Water drought rates are just one option among others to maintain financial position, including implementing partial water drought rates, utilizing water reserve funds, and deferring CIP expenditures. The current water drought rate structure has a usage allotment for all customers of 10 ccf every bi-monthly billing period that is exempt from the charges. Based on updated consumption patterns, staff recommends reducing the drought allotment to 8 ccf per bi-monthly period to ensure the total annual usage allotment remains below the annual usage reduction requirement for each water shortage stage. The attached technical memorandum compares the recommended drought rates with 8 ccf allotment to the current drought rates with 10 ccf allotment. Note that based on the City Council’s direction to move forward with 100 percent fixed charge recovery of Zone 7 fixed costs, the recommended water drought rates will be lower than the current drought rates, as it is now just the City’s variable charge recovering a portion of its fixed costs that is at risk during water shortage emergencies. The attached technical memorandum also illustrates the Year 1 bill impacts of drought rates during Stage 2 shortage (20 percent usage reduction) for a single-family customer at different water usage levels. Note that for all usage levels, if the customer achieves the usage reduction, they will have a lower bi-monthly bill despite the drought rate charges. For low-end users, the customer will not be charged drought rates since the reduced usage falls within the allotment, such that if the low-end user does not reduce their usage, the drought rate impact is minimal. As an alternative, WRE evaluated a new drought rate structure with no drought allotment; the attached technical memorandum presents the drought rates for this alternative. Note that the rates are lower than both the current drought rates with a 10 ccf allotment and the new recommended drought rates with an 8 ccf allotment because the required revenue is charged to all usage. The attached technical memorandum illustrates the Year 1 bill impacts of the alternative drought rates during Stage 2 shortage for a single-family customer at different water usage levels. Like the recommended alternative at all usage levels, if the customer achieves the usage reduction they will have a lower bi-monthly bill despite the drought rate charges. For low-end users, if the customer does not reduce their usage the alternative drought rate increases their bill by about six percent. Page 195 of 226