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Page 1 Memo To: Siew-Chin Yeong, Director of Public Works – City of Pleasanton From: Sanjay Gaur, Founder/President – Water Resources Economics, LLC Date: April 25, 2025 Re: Water Rate Scenarios Technical Memo INTRODUCTION Water Resources Economics, LLC (WRE) was engaged by the City of Pleasanton (City) in 2024 to conduct a water and recycled water rate study to develop an updated four-year schedule of water and recycled water rates. The City is seeking City Council input on potential rate structure and discount program options to complete the rate study process and finalize a multi-year proposed water rate structure. Each scenario has been devised based on proposed changes to recovery of Zone 7 fixed costs, the variable charge rate structure, and the eligibility requirements of the City’s discount program. The following rate structure scenarios were devised with the following goals in mind: • Enhancing revenue stability and reducing the City’s financial risk related to Zone 7 water supply in case of decreased future water consumption • Improving legal defensibility of rate structure in uncertain legal landscape RECOVERY OF ZONE 7 FIXED COSTS The City’s collects water rate revenue through bi-monthly fixed charges and variable charges based on customer usage. Bi-monthly fixed charges are collected every billing period regardless of the amount of water customers consume. The City’s only source of supply is imported water from Zone 7 Water Agency. The cost of purchasing water from Zone 7 represents a significant portion of operating expenses in FY 2025 (over 70% of operating expenses). Zone 7 costs include two components: • An annual fixed cost, billed to the City regardless of imported water purchases • A variable cost, based on imported water purchases in hundred cubic feet (ccf) In FY 2025, fixed costs represent 44% of total Zone 7 costs to the City. The fixed charge is reviewed and updated annually by Zone 7. It is common for water agencies to recover some fixed costs through variable charges to lessen the impact on lower water users. However, in periods of reduced water demand this poses a risk that the agency will not recover enough variable charge rate revenue to cover its fixed costs. To maintain financial stability and sufficiency of the water enterprise, the City will need to ensure that it can cover its Zone 7 fixed costs, even during periods of decreased water demand and decreased consumption charge revenue. Although Zone 7 has always imposed an annual fixed charge, the City has historically recovered both Zone 7 fixed and variable costs through its variable charges. The City’s last rate study, which was completed in 2023, increased Zone 7 fixed cost recovery on fixed charges from 0% to the current level of 32%. In comparison, neighboring agencies who also rely on Zone 7 for supply recover more fixed costs than the City. It is important to find a balance between ensuring revenue stability and for the City and customer affordability, especially for lower water users. Two scenarios for recovery of Zone 7 fixed costs on fixed charges will be Page 211 of 249