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Page 3 of 8 Association (AWWA) Manual M1 and are in line with industry standards and legal requirements outlined in Proposition 218. The rate design analysis involves the development of a rate structure that considers cost of service and related policy and pricing objectives. A summary of the major rate structure policy topics is provided below. Tiered vs. Uniform Consumption-Based Variable Charges Tiered consumption-based variable charges have historically been a common rate structure used by water agencies - including the City - to promote water conservation and maintain affordability for lower water users. Over the past three years, several court cases in California have addressed the legality of using tiers, primarily focusing on their compliance with Proposition 218 requirements in that: • Rates must be proportional to the cost of service. • Revenue cannot exceed the funds required to provide the service. • No user should pay more than their proportional share. • Agencies must demonstrate the cost basis for each tier. Based on recent court cases, WRE uses the following guidelines when considering tiered consumption-based variable charges: • Strict Proportionality: The water charges strictly reflect the actual cost of providing service at each consumption level, in compliance with public notification requirements (i.e., Proposition 218). • Conservation vs. Compliance: While promoting water conservation is crucial, rate structures must still adhere to legal requirements, ensuring that the resulting water rate structure is cost-justified. The City’s current consumption-based variable charges include a 4-tiered rate structure for Single Family, and a uniform rate structure for Multi-Family, Commercial/Industrial, and Potable Irrigation. Where tiered-rate structures are used in the industry, they are typically cost- justified based on the availability of alternative water supply sources, conservation program costs, and/or revenue offsets from non-rate revenues such as property taxes. For the City, Zone 7 is currently the only water supply source available (City groundwater pumping allotment will not be used during the time period of these rates), its conservation program costs are minimal, and the water enterprise does not have non-rate revenue offsets. For these reasons, staff recommends that the City utilize a uniform consumption-based variable rate structure for all customer classes. Variable and Fixed Charges Consumption-based variable charges represent the portion of a water bill charged to the customer that is dependent on their water consumption. City water customers have two variable charges: Zone 7 variable charges (related to City water supply purchases from Zone 7) and City variable charges (related to the City’s delivery of water to customers). Zone 7’s variable charges are determined by Zone 7. The City’s variable charges include the following costs: • Treatment costs – chemicals and energy required to treat water with fluoride and to Page 205 of 249