CITY COUNCIL REGULAR AGENDA PACKET

Page 2 of 9 deliver this purchased water to its customers. 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 its water systems and to replenish the reserves to City Council-approved levels. Subsequently, 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 the financial needs of the water program moving forward. In 2024, the City also contracted with Water Resources Economics, LLC (WRE) to perform a water rate study to establish cost- based, fair, and legally defensible rates and connection fees to support the long-term financial sustainability of the City's water program. To recommend new water rates and connection fees, the City followed a multiple-step process that complies with Proposition 218 and incorporates policy direction from the City Council: 1. Financial Plan - In March 2025, the City Council approved a water system financial plan prepared by WRE, which included implementing the 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 issuance of $35 million of debt to fund near-term capital improvements. 2. Cost-of-Service - In May 2025, WRE performed a cost-of-service analysis to allocate the revenue requirements determined as part of the financial plan among the different customer classes. The City Council approved the recommended rate structure, which included uniform consumption-based variable charges for all customer classes (as opposed to tiered) to be consistent with recent legal rulings that require strict proportionality of water charges to reflect the actual cost of service. The recommended rate structure also included Zone 7's fixed costs being 100 percent recovered as pass- through fixed charges to customers (as opposed to a portion of Zone 7's fixed costs recovered as variable charges) to reduce financial risk to the water program in periods of reduced water demand. 3. Drought Rates - In June 2025, WRE analyzed drought rates, which are consumption- based surcharges that can be implemented during water shortage emergencies to maintain the City’s financial position. The City Council approved the recommended rate structure, which includes a usage allotment that is exempt from the drought rate charges every bi-monthly billing period for all customers of 8 centum cubic feet (ccf). The allotment accounts for the difficulty of reducing low-end usage during water shortage emergencies but encourages reducing high-end usage to meet needed conservation targets. 4. Connection Fees – In June 2025, WRE also performed an analysis of connection fees, which are one-time capital fees assessed against new developments to recover the proportional share of capital facility investment to be constructed or previously constructed to accommodate growth. The City Council approved the hybrid method for connection fee calculations, which is typically used for water systems like the City that have some capacity available to serve new growth but also require some additional expansion. 5. Water Rate Study Report – In July 2025, WRE prepared the 2025 Water Rate Study report (see Attachment 1) to document the proposed rate development process and demonstrate a sufficient nexus between the costs incurred by the City to provide water Page 209 of 376