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It appears that almost 90%of the proposed rate increase will fund the CIP through increased annual CIP allocations,covering debt service on bonds to be issued in 2017/18, and large increases to the OP reserves. We don't understand the basis to increase CIP finding by such a large amount. Thus,we believe Zone 7 should take some time to further develop its CIP to ensure(1) the proposed projects are fully justified, (2)that there is a reasonable implementation timeline,and(3)that Zone 7 relies on issuing bonds for the major capital projects to reflect the useful life of the facility and ensures future users pay their fair share of the cost. Zone 7 should then develop a rate proposal that reflects the outcome of that exercise. We are also uncomfortable with the proposed changes to the rate structure. We request that Zone 7 spend time evaluating rate structure options and work with the retailers to ensure any new structure is uniform and relatively easy to understand and implement. Finally, we understand one of the reasons for such a large rate increase is to prepare Zone 7 to receive a favorable rating when it issues bonds by significantly increasing the level of CIP reserves. However, the rating agencies will not expect Zone 7 to have excessive reserves to receive a favorable rating. Rather, rating agencies will want to see(1) reasonable operating reserves equal to 20%to 30%of operating expenses,(2)a reasonable level of reserves to cover emergency capital project expenses(the$18 million Zone 7 currently has in Fund 120 would be sufficient), (3)a proven track record of increasing rates when required to cover expenses, (4)a solid 10-year capital plan, and(5) good relationships with retailers who also have strong credit ratings. Thank you very much for considering the perspective of the City of Pleasanton. We share the challenge of meeting the water needs of our end-users and appreciate the efforts of Zone 7 to meet this challenge. We trust that you will consider our recommendations before finalizing proposed rate increases particularly in the context of the partnership we have long established. We look forward to your response. Sincerely, Nelson Fialho Tina Olson City Manager Director of Finance cc: Jerry Thorne, Mayor, City of Pleasanton and Councilmembers Bert Michalczyk, Dublin San Ramon Services District Marc Roberts, City of Livermore Frank Vallejo, Cal Water Livermore