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Councilmember Narum asked and confirmed that the Council set a policy that every January rates can be increased by the CPI which does not require Council action. If the City was building up funds, Ms. Wagner said the Council could always choose not to implement the CPI increase if more money was being collected than needed. Mr. Fialho said the resolution the Council is being asked to approve allows the ability to pass on the CPI and this is in normal conditions. If, for example, the drought is sustained in long-term, under the current fee methodology, the City will run out of money and will not be able to sustain the utility. The Council will then have the option of implementing the drought surcharge for one year and the City will ask people to conserve at a certain stage and at the conclusion of that year, the Finance Committee will convene and review the financial position of the utility and decide whether it is financially sound or not. If not, the Council would look at its reserve balance, repair or replacement plan and on-going operations. If the Council felt like it did not have to extend the drought surcharge for another year, they would operate under the cash flow the City has accumulated under that particular year. There is a true- up opportunity every year if this condition is implemented. Councilmember Narum asked and confirmed that if this true-up resulted in the fund being financially sound, no CPI for a year could be instituted. Mr. Fialho added that the more likely scenario will be to undo the surcharge after 12 months of operation and then secondly, the CPI would be reviewed as to it being implemented or not. Given the cost of chemicals, labor and maintenance, the Council will likely implement the CPI, and the Council retains that option. The community can conserve under the current methodology structure but the surcharge would only be triggered for financial reasons for a year and then re-evaluate it. Mayor Thorne voiced frustration, stating when the recession hit hard the City had a hiring freeze, was not adding anything to its capital budgets and he noticed Zone 7 is not doing that. He said the drought is equivalent to a downturn to water agencies, but are still adding to their capital budget and he wants to be sure that the public understands they need to talk to representatives from Zone 7 because they will not react to the City so much as they will to the public, particularly to the business community. Vice-Mayor Brown said earlier tonight under the Consent Calendar, the Council agreed that a letter would come from the City to Zone 7 which will address this point. In going back to drought rates and the CPI, she asked and confirmed that drought rates would be only for the year and then are renewed as needed. Ms. Wagner clarified that drought rates would be a separate action for the Council and she suggested when or if the Council did address them, that all issues be considered, including the CPI increase and what impact the drought rate had on the utility. Vice-Mayor Brown said Zone 7 has recently instituted a 3% for 2014 and 3% for 2015 CPI. If the City is buying water, it already has a CPI index on it and then the City is adding a CPI index. She asked if this is only on the portion for repair and replacement on the delivery system or is it on the water, which already received a CPI increase. Ms. Wagner said she went back to the proposed rate and said Zone 7's charges are a pass-through rate. The distribution cost item and meter charges are the only items that incur the CPI increases. The recycled water and capacity is not charged added CPI. Ms. Wagner continued her presentation and addressed recycled water rates which are only available to commercial customers because they have a domestic meter and irrigation meter. Retrofits are being conducted for irrigation and customers will be able to take advantage of recycled water rates which are currently $2.35 and will rise to $2.65 as compared to the potable rate at $2.91. They are also setting up recycled water as a separate enterprise fund to fund repair and replacement of the recycled water system. Ms. Wagner discussed sewer rates and said these are proposed to increase by 3% across the board. In addition, beginning July 1, 2016 these rates will increase by the change in CPI. City Council Minutes Page 20 of 28 October 6,2015