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Page 2 of 8 continue to offer the discount program to qualified low-income customers with less than 30 CCF bi-monthly usage. BACKGROUND The City is a water retailer that operates and maintains a water distribution system to city residences and businesses for domestic, irrigation, firefighting and other uses. Zone 7 Water Agency (Zone 7) is the Tri-Valley’s water wholesaler that procures water from the California Department of Water Resources (DWR) and produces water from its regional wells, which it sells to the City and other Tri-Valley water retailers for distribution. Effective November 2022, the City discontinued distributing water supplied from the City-owned groundwater wells due to increasing per- and polyfluoroalkyl (PFAS) regulatory requirements. Since that time, the City has been receiving 100 percent of its water supply from Zone 7. In 2023, the City Council approved a two-year water rate increase (30 percent in 2024 and 12 percent in 2025) to help maintain adequate funding for short-term operations and maintenance of the water system and replenish the Water operations and maintenance (O&M) Fund 420 reserves to City Council-approved levels. Subsequently, the City completed the Water System Management Plan (WSMP), which identified a 20-year Capital Improvement Program (CIP) and long-term operations and maintenance strategies. In January 2025, the City Council approved the WSMP, which serves as the foundation for the financial planning component of this rate study. On March 4, 2025, the City Council approved the Water Enterprise Financial Plan (step one of the water rate study process), including implementing the Enhanced project delivery model from the WSMP, a revenue increase of 15 percent for the first two years and 8 percent for the following two years, and issuing $35 million of debt to fund near-term capital improvements. With the financial plan in place, staff developed step two of the rate study process, which includes: • Cost of service study that allocates the revenue requirements determined as part of the previously completed financial analysis (step one) among different customer classes • Rate design analysis that makes recommendations on rate structure that consider cost of service and related policy and pricing objectives • Estimation of the impact on the General Fund to maintain the City’s current discount programs. A separate rate study for the sewer enterprise is scheduled to begin in late 2025, following completion of the Sewer System Management Plan (SSMP) and the Long-Term Sewer Capital Improvement Plan (CIP). In the interim, staff will recommend adjusting sewer rates annually based on the Consumer Price Index (CPI) until the study is complete as part of a future City Council agenda item. DISCUSSION The objective of the cost of service study is to ensure revenue requirements are equitably distributed to ratepayers commensurate with their service requirements. The cost of service study was developed using the principles established by the American Water Works Page 204 of 249