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Page 1 of 8 Item #19 CITY COUNCIL AGENDA REPORT May 6, 2025 Public Works - Utilities Division TITLE: RECEIVE THE WATER AND RECYCLED WATER COST OF SERVICE STUDY AND RATE DESIGN ANALYSIS, APPROVE A RATE STRUCTURE THAT INCLUDES UNIFORM CONSUMPTION-BASED VARIABLE RATES AND FULL FIXED CHARGE RECOVERY OF ZONE 7 FIXED COSTS, AND APPROVE CHANGES TO CUSTOMER DISCOUNT PROGRAMS BASED ON LOW-INCOME ELIGIBILITY SUMMARY The City owns and operates water and recycled water systems that supply and deliver potable and recycled water to its customers and a sewer system that conveys sewage from its customers to wastewater treatment plants. These systems are managed financially as separate enterprise funds. On September 3, 2024, the City contracted with Water Resources Economics, LLC (WRE) to perform rate studies and develop cost-based, legally defensible rates for existing customers, using a three-step process. These rate studies are designed to support the long-term financial sustainability of the City’s utility operations and industry best practices, and to comply with public notification requirements (i.e., Proposition 218). As the first step in the process, on March 4, 2025, the City Council approved the Water Enterprise Financial Plan, which analyzed the revenue increase needed to support the capital improvement projects (CIP) and operations and maintenance (O&M) programs identified in the Water System Management Plan (WSMP). Staff have now completed step two: performing a cost of service study and rate design analysis. This agenda report summarizes that analysis, including recommendations for rate structures and preliminary four-year rates, with a recommendation to approve a rate structure that includes uniform consumption-based variable rates and full fixed charge recovery of Zone 7 fixed costs, and changes to customer discount programs based on low-income eligibility. Next steps include finalizing proposed water and recycled water rates based on City Council direction on the rate structure, updating water connection fees in accordance with Proposition 26, and developing updated drought/water shortage rates. These items are scheduled to be presented to the City Council in June 2025, followed by City Council final approval of the public notifications in July 2025, with the public hearing process from August through October 2025, and new water rates effective on January 1, 2026. RECOMMENDATION 1. Receive the water and recycled water cost of service study and rate design analysis. 2. Approve rate structure, including uniform consumption-based variable charges for all customer classes and full fixed charge recovery of Zone 7 fixed costs. 3. Accept staff recommendations to discontinue the senior discount program and to Page 203 of 249