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BACKGROUND The City does not own and operate a water treatment plant. Instead, the City relies on two primary sources for its water supply to its customers: Local groundwater from four City -owned deep wells, which accounts for 18 percent of the current 17 million gallons per day (mgd) average daily demand. Water purchased from Zone 7 of Alameda County Flood Control and Water Conservation District, which accounts for the remaining 82 percent of the demand. The cost of water from Zone 7 and the local groundwater represent approximately 75% of the City's cost to deliver water to its customers. The last time the City increased water rates was January 1, 2001. Since 2001 Zone 7 has increased the cost of water purchased by the City by approximately 46 Zone 7 has notified the City that they will be increasing their water rates effective January 1, 2010 by an additional 9.25 This increase is equivalent to an approximately $6.34 increase in the average water customer's bi- monthly bill. Staff has been meeting with Staff from Zone 7 and the other three Tri- Valley water retailers to try and find ways to defer, defray, reduce or eliminate the need for the increase. Unfortunately, staff has not been successful in their efforts and therefore is recommending that Council send a letter to the Zone 7 Board of Directors requesting that the Board forego a rate increase this year and utilize reserves and /or expenditure reductions as necessary to balance the budget. The proposed letter is attached (Attachment A). DISCUSSION This is a unique and severe economic time for the customers served by both the water retailers and Zone 7. Pleasanton has not raised its water rates to its customers since 2001 but during this almost ten year period, the City has absorbed approximately 46% cumulative rate increases in Zone 7 water rates. Over the years we have balanced our water budget by staff reductions and reorganizations, no salary increases for management staff, deferring capital improvement projects and utilizing reserves to balance our budget. While we understand Zone 7 will be keeping positions vacant and is also considering other staff cost reductions, Zone 7 has had major rate increases since 2001 and projections show further significant increases each year in the future. We understand that many of these increases are driven by the current Zone 7 policy of pay -as- you -go financing of capital projects. Most organizations use a prudent mix of pay -as- you -go combined with debt financing for their more costly significant projects. This mix of financing alternatives better matches the benefit from the project and its useful life with the customers receiving the improvement (rather than collecting significant amounts from current customers who may never benefit from the major capital improvement when it is put into service many years later). Zone 7 had approximately $21 million in reserve funds at the end of FY 2008. When the 2009 rate increase was adopted (effective January 1, 2009), the Zone 7 Board was Page 2 of 3