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12. Presentation by Zone 7 Water Agency on the Water Supply Study Update and proposed Wholesale Water Rates The staff report was introduced by Director of Operations and Water Utilities Kathleen Yurchak and presented by Revenue Manager Tamara Baptista. Staff noted the Zone 7 Water Agency Board will be taking direction on rates for 2019 and this presentation will provide an overview of proposed rates. Staff has also been participating in all Zone 7 workshops to consider rate changes. Zone 7 General Manager Valerie Pryor provided an overview of Zone 7's proposed water rates, including the various planning documents. These included the water supply evaluation process, updated water demands and State water project reliability. There was a need for additional water supply and a public and transparent process for discussing proposed wholesale water rates for 2019 through 2022. There were various Board workshops conducted and scenarios presented, including rate options. Currently, the Board will review two scenarios at their October 17, 2018 meeting. The scenarios will not include any new operating programs or staff, however, they will include ozone treatment increases in energy costs, an annual capital improvement program to span 10 years, asset management policy, maintenance of infrastructure, and use of reserves. The Board will look at changing and reviewing their reserve policy, water supply reliability, and costs for upcoming water reliability projects. The current proposals for these projects are estimated at $3 million over four years. Ms. Pryor reviewed the two scenarios which will be presented at the October 17, 2018 Board meeting to include Scenario 1 (6.7% per year) and Scenario 2 (6.0% per year). Scenario 1 would fund the three reserves at target levels and Scenario 2 would fund two of the reserves at target levels and one of the reserves at the minimum level. Councilmember Olson inquired whether the irrigation customer is paying the recyclable water charge and Ms. Pryor confirmed this was accurate. Revenue Manager Baptista presented a PowerPoint Presentation and reviewed Scenario 1 and Scenario 2 and their impacts on Pleasanton rate payers. She noted the fixed component of the rate structure would gradually increase from 35% to 45% in years 2019 through 2022. Staff converted the rate information to a per unit charge which was reflected at $3.35/CCF for Scenario 1 and $3.34/CCF for Scenario 2. She further detailed the fixed charge as compared to the variable charge, the impact to single family home water charges, the recycled water charge, reserve information, and debt management issues. It was staff's recommendation that the City Council support delivery of the City's comments to the Board, including delaying the vote on the multi-rate to provide more time for consideration and comment, issuing bonds for major capital projects, revisiting the Board's reserve policy, and reorganizing the reserves to create a budget surplus, rather than raising rates. Councilmember Olson inquired whether the $14.1 million was a total for the "four funding buckets," and staff confirmed the $14 million would fund two reserves (operating and emergency reserves) at target levels and the drop contingency reserve at the minimum level. Councilmember Olson inquired as to the bond rating of the Zone 7 agency and staff confirmed it held an AA+ credit rating. Councilmember Olson inquired as to an item on page 14 of the treated water wholesale study report. He expressed concern the fixed charges are increasing at a significantly higher rate than the variable charge. Ms. Pryor stated fixed costs include capital expenditure items and infrastructure. She further noted the Board will be reviewing their policy on issuing bonds, their reserve fund policies, and debt management procedures. City Council Minutes Page 5 of 9 October 16, 2018