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demands associated with a particular customer class could justify allocating costs based on peak use rather than average demand. In the City's case, setting rates to discourage waste is a key objective. Not only is this sound resource management in a world of increasing scarcity, it makes good financial sense in view of how much of the revenue requirement is represented by the cost of Zone 7 water. The easiest sector of demand in which to encourage efficiency is irrigation, which is also where considerable peak demand occurs. In keeping with the City's objective, we recommend setting the City's consumption charges to reflect seasonal demand. This was accomplished by allocating costs other than the cost of Zone 7 water (which does not vary seasonally) in proportion to peak season demand, rather than average annual demand. These allocations also reflected the shift of MFR customers from the residential to the commercial class to reflect the commercial status of landlords. Figure 3 -2 compares the distribution of projected FY 2010 -11 revenue among customer classes based on (1) the current rates structure, (2) the current rate structure increased across the board by the projected 27% increase in consumption charge revenue, and (3) the rates revised for the cost -of- service allocations and shift of MFR customers from the SFR class to the commercial class. The results indicate the following: Current rates with no increase. The commercial class (excluding MFR customers) pays a disproportionately small portion of the revenue from consumption charges, which reflects a cost -of- service analysis prepared 17 years ago. Since then, the relative demand among customer classes has shifted. Current rates with across the -board increase. Applying a 27% increase to the existing consumption charges perpetuates the current disparity among customer classes. Revised rates with increase. The combination of applying peak allocations and shifting MFR customers to the commercial class yields a slightly lower 24% increase for the SFR customers and higher increases for the commercial and irrigation customers. With these increases, the SFR and commercial classes pay an average cost per HCF that is lower than the overall $2.22 /HCF. The irrigation customers pay an above average cost because of their comparatively high peaking. March 18, 2010 Page 12 HF&H Consultants, LLC