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Page 4 of 5 Staff recommends a water drought rate structure with an 8 ccf allotment. This structure accounts for the difficulty of reducing low-end usage during water shortage emergencies but encourages reducing high-end usage to meet needed conservation targets. Water Connection Fees Water connection fees are one-time capital charges assessed against new development to recover the proportional share of capital facility investment to be constructed or previously constructed to accommodate growth. Connection fees must reflect the link between the fee imposed on, and the benefit received, by a new connection to the system and may not exceed the reasonable share of costs associated with providing the service. The method for calculating connection fees generally utilizes one of three approaches: 1. Incremental Cost Method – This method states that new users should pay for the additional capacity and expansion costs to the water system necessary to accommodate them. The method is calculated by dividing the total of expansion capital projects (as estimated in the WSMP) by the anticipated total increase in future DUEs to determine the connection fee per DUE. This method is how the City has historically calculated its water connection fees. 2. Buy-in Method – This method is designed to recover the historical costs of infrastructure investments in proportion to the amount of built capacity, some of which is available for new growth. It is calculated by taking the current water system value and dividing it by the current DUEs to determine the connection per DUE. 3. Hybrid Method – This method is typically used where the existing water system has some capacity available to serve new growth, but some additional expansion is also needed to accommodate new development. This method is calculated by determining the buy-in and incremental fees and adding them together. Revenues from the buy-in component are transferred to the water enterprise fund to refund existing customers and revenues from the incremental component are transferred to the CIP expansion fund. Recent water conservation trends have decreased the burden of current water customers on the City’s water system, leading the City to realize some spare capacity available for future growth. However, as determined in the WSMP, portions of the water system require expansion to accommodate new development, particularly related to water supply transmission and storage. Therefore, staff recommends utilizing the hybrid method to determine connection fees. The recommended connection fee is $5,269 per DUE with the buy-in component at $2,444 and the incremental component at $2,825 (refer to the attached technical memorandum by WRE for calculations). As a comparison, the City of Livermore’s connection fee is $5,462 per DUE and DSRSD’s connection fee is $15,670 per DUE. The City’s water connection fee is recommended to be increased each year by the Consumer Price Index. As the City updates its water system planning in future years, the cost of capacity improvements to support growth and the water system's value may change. The adequacy of the connection fee will be monitored and adjusted as needed. NEXT STEPS With direction and approval of water drought rates and water connection fees by the City Page 196 of 226