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and equitable rates be established across all customer classifications. Additional guidelines and parameters include encouraging water conservation, maintaining senior and low income discounts to the degree that is fiscally possible, designing rates to maintain reserves throughout drought periods and identifying funding for the city's recycled water program. The city hired HDR Engineering to prepare a rate study based on these parameters. This effort was complimented by regular meetings of the Audit Committee, comprised of Councilmember Olson, Vice Mayor Brown and staff, to review the rates and consider all possible alternatives. The rate study concluded that Pleasanton has billed customers for approximately 87.5% of the cost water purchased from Zone 7, and that the city can no longer absorb this cost and must instead pass 100% of the cost of wholesale water rates to its customers. The study concluded that the city needs to repair and replacement of its infrastructure through its rates in an amount equal to annual depreciation, although it should be noted that is not achieved in this study. The study further concluded that drought rates, which differ from drought penalties, must be established to maintain reserves and financial stability during a drought and that recycled water rates are needed to fund the cost of operations of the newly established recycled water enterprise. On October 6, 2015 the City Council will consider water and sewer rate proposals that will accomplish the following: • A proposed increase of 6.7% to water rates, effective October 15, 2015 with certain components of the rate structure increasing annually by the CPI adjustment beginning January 1, 2016; • Implementation of recycled water rates, proposed to be equal to 90% of potable irrigation rates and increasing annually accordingly; • A proposed increase of 3% to sewer rates, effective October 15, 2015 and increasing annually by the CPI adjustment beginning July 1, 2016 Ms. Wagner presented several slides reviewing the proposed water rate increases, noting again the recommendation to pass through 100% of Zone 7 rates as well as an increase to fund repair and replacement in an amount equal to annual depreciation. The distribution charges within each rate would be subject to the annual CPI increase and Zone 7 rates would increase as appropriate based on rate adjustments initiated by Zone 7. All single-family residential rate tiers are proposed to increase by 30 cents per one hundred cubic feet (CCF) with exception of Tier 2, to which staff has proposed applying an additional 10 cent per CCF recycled water surcharge. Commercial, multi-family and potable irrigation accounts would also increase 30 cents per CCF. She briefly reviewed the potential impact to consumers based on current low, moderate and high usage categories, noting that the national average for bi-monthly use is 23 CCF. She introduced the proposed drought rates, which would not go into effect without separate and additional action by the Council. She explained that the rate surcharge is intended to maintain financial stability when conservation reduces consumption to the point that infrastructure reserves are threatened. She also explained that due to the assumed conservation, the additional rate would have a very minimal impact on ratepayers' bill. Reviewing single-family residential examples at low consumption and the required conservation levels, she demonstrated how the surcharge from Stages 1 through 4 would increase a user's bill anywhere from 70 cents to $6. She stressed again that while the overall rate structure would take effect October 15, 2015 if adopted by the Council, these rates would not go into effect without special action by the Council following a recommendation by staff. Mayor Thorne stressed that tonight's requested action is simply to authorize staff mail the Proposition 218 notice. No action to change rates will be taken tonight. Vice Mayor Brown asked why, assuming that a drought situation results in conservation and therefore less water is purchased while fixed costs remain steady, a user's bill would increase. City Council Minutes Page 8 of 17 July 21, 2015