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BACKGROUND On August 26, 2015 and September 16, 2015, the Zone 7 Board of Directors held public meetings during which Zone 7 staff discussed and reviewed its budget forecast for 2016-2018. Zone 7's revenues have declined due to water conservation, and as a consequence, its operating reserves have been nearly depleted. In addition, Zone 7 has not and will not be able to transfer as much to its Capital Improvement Fund (CIP) as it has in prior years which has caused CIP reserves to decline. Zone 7 has presented a three-component water rate proposal which it is anticipating passing at its October 21, 2015 Board meeting and which will go into effect on January 1, 2016. A summary of the three components is as follows: Component 1- A two-part fixed charge based on 5-year rolling demand and 3-year rolling peak month. The amount of this rate component would vary between the retailers (Pleasanton, DSRSD, Livermore, and Cal Water Livermore) depending on historic usage and peaking. The City of Pleasanton's fixed charge would be proportionately larger than the other three retailers, in part because Pleasanton has the greatest number of customers (about 35%). Fixed charges do not consider the geographical variance on the expense side of cost in their design: Ground water is cheaper to produce than surface water, and Pleasanton uses a higher proportion of ground water than Livermore, yet Pleasanton will pay a higher fixed charge. Component 2- Temporary three-year Conservation Surcharge. This component would also vary between retailers and is based on the 5-year rolling demand average. Again, the City of Pleasanton would pay a proportionately higher rate than the other retailers because it has the greatest number of customers. Component 3- Fixed uniform rate on each CCF purchased. This component would be the same for all the retailers beginning at $1.68/CCF for 2016, and increasing to $1.91 in 2017 and $2.16 in 2018. During these meetings, the City of Pleasanton has argued for a rate that is consistent, fair and equitable to all of the retailers, and which would replenish operating reserves to an amount equal to between 20% and 30% of operating expenses. The City requested that the conservation surcharge be evaluated annually to determine whether or not it needs to be continued to maintain operating reserves. From Zone 7's rate presentations and supporting documents, it appears that almost 90% of the proposed rate increase will fund the CIP through increased annual CIP allocations and the payment of debt service on a $43 million bond it plans to issue in FY 2017/18. The City of Pleasanton has requested that Zone 7 take more time to further develop its CIP to ensure the proposed projects are fully justified, that there is a reasonable implementation timeline, and that Zone 7 rely on issuing bonds for the major capital projects with payback periods to reflect the useful life of the respective facility to ensure future users pay their fair share of the cost. Zone 7 has estimated that the 2016 wholesale water rate increase impact to the City of Pleasanton will be an additional $0.84/CCF, which would equate to an approximate annual increase of $3,500,000 that the City would allocate to its residential and Page 2 of 3