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City of Pleasanton Water Drought Rates and Connection Fees Technical Memo Page 6 3The RCLD (Replacement Cost Less Depreciation) asset valuation method is calculated based on the total replacement cost of each system asset, less total accumulated depreciation over each asset’s useful life The City has used the incremental cost method to calculate connection fees in the past, which are based on projected capital costs to build new capacity and estimated units of service that the new capital projects can accommodate. Recent water conservation trends have decreased the burden of current water customers on the City’s water system, leading the City to realize remaining capacity within the City’s existing system to accommodate new growth. WRE recommends the Hybrid Method for the City’s water connection fees since the existing water system has remaining capacity to serve new customers and the City has planned capacity related capital projects within the next 20 years to accommodate additional growth. Under the Hybrid Method, the revenues from the Equity Buy-In component are transferred to the water enterprise fund to “refund” existing customers, and revenues from the Incremental component are used to fund expansion-related capital costs. Updating the methodology from the Incremental Cost Method to the Hybrid Method involves the following: • Updating the Incremental component based on the City’s 20-year capital costs to accommodate new growth and estimated units of service new capital projects can accommodate • Adding the Equity Buy-In component based on the City’s valuation of current system assets and estimated units of service related to current customers • Increasing connection fees by CPI each year PROPOSED CONNECTION FEES AND IMPACTS The table below shows the connection fee calculation based on the Hybrid Method. Buy-In costs are allocated towards the current system, and Incremental costs are allocated towards the future system. The proposed connection fee per unit of service is $5,269, representing the total of current and future system capacity costs. The graph below shows the proposed connection fee based on the Hybrid Method relative to the current connection fee and the connection fees of other agencies that also receive Zone 7 water. The current connection fee includes only future system capacity costs and is currently the lowest relative to other agencies. After the proposed changes the connection fee remains the lowest relative to other agencies. Connection fees are typically more variable by agency than rates since they are dependent on agency specific system characteristics. System Value Current System Future System Total Buy-In $102,339,948 $102,339,948 Incremental - Water Supply, Transmission & Quality $6,777,458 $6,777,458 Incremental - Water Distribution Piping $3,380,000 $3,380,000 Incremental - Water Facilities $13,016,200 $13,016,200 Total $102,339,948 $23,173,658 $125,513,606 Unit Cost Current System Future System Total Existing System Value (Buy-In)$102,339,948 $102,339,948 Future User CIP (Incremental)$23,173,658 $23,173,658 Equivalent Meters Served 41,880 8,205 50,085 Connection Fee $2,444 $2,825 $5,269 Page 203 of 226