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City of Pleasanton <br />Sewer Rate Study Report <br /> <br />Water Resources Economics <br />9 <br />Figure 1-3: Projected Debt Coverage (Proposed) <br /> <br />1.10 COST-OF-SERVICE ANALYSIS AND SEWER RATES <br />A cost-of-service analysis is a technical process used to determine the cost of providing sewer <br />service to the City’s customers based on each customer’s use of and burden on the sewer <br />system. The cost-of-service analysis is the basis of the nexus between the costs incurred by the <br />utility to provide sewer service and the sewer rates charged to customers, which is a requirement <br />of Proposition 218. <br /> <br />COST-OF-SERVICE AND RATES METHODOLOGY <br />The overall goal of the cost-of-service analysis is to develop “unit costs,” which provide the basis <br />from which proposed rates are directly calculated. Note that although the study period spans <br />multiple years, the cost-of-service analysis is limited to a single representative year referred to as <br />the “test year.” The test year in this study is FY 2027. <br /> <br />The proposed sewer rate schedule was developed based on the results of the proposed financial <br />plan and cost-of-service analysis. The key steps in conducting a cost-of-service analysis and <br />developing the proposed rate schedule are outlined below: <br /> <br />• Revenue requirement determination: The revenue requirement for the test year is <br />determined based on the results of the proposed financial plan and allocated to each <br />customer class based on wastewater flow estimates. <br />• Unit cost development: Allocated revenue requirements are divided by the appropriate <br />units of service for each customer class to establish unit costs for the test year (FY 2027). <br />Unit costs represent proposed rates for the first year of rates (FY 2027). Although total rate <br />Page 161 of 923