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1. Allocating water reductions between various customer classes based on defined drought stages 2. Calculating financial impacts to the City in each stage 3. Determining the most appropriate drought cost recovery mechanism(rate structure) 4. Evaluating financial impacts to customers For the first step of the drought rate study, City staff provided the Water Shortage Contingency Plan which was adopted in 2021. Table 1-7 shows the overall reduction targets for the entire water system. Table 1-7: Drought Stages and Reduction Line Water Reduction Baseline Stag- Stage 2 Stage 3 Stage 4 Stage 5 --,I 1 Target Reduction Goal 0% <10% <20% <30% <40% <50% >50% The water sales by drought stage are calculated using the target reductions developed in the Water Shortage Contingency Plan. Table 1-8 shows the estimated water sales in ccf for each stage of drought that aligns with the percent reductions shown above in Table 1-7. Baseline is defined as water usage estimated in FY 2024. Table 1-8: Estimated Water Sales by Stage (ccf) Line Water Sales in ed(FY 2024) Base"e Stage I Stage 2 Stage 3 Stage 4 Stage 5 Stage 6 1 Total 4,014,809 3,613,328 3,211,847 2,810,366 2,408,885 2,007,404 1,851,723 2 Percent Reduction -10% -20% -30% -40% -50% -54% A key step in a drought rate study is to calculate the financial implications for the City during a drought. Considerations include: • How much commodity revenue is expected due to cutbacks? • How much will this change the City's water supply mix and the costs associated with each source? • How will this change the City's operating costs, if at all? For the City, the most significant financial consequence is the loss of consumption-based revenue, the severity of which depends on the drought stage. Drought conditions will also require more staff to be hired to handle conservation efforts and respond to an increase in customer service requests. There will be additional costs associated with drought including increased printing and mailing costs for noticing customers of changes to their rates and other miscellaneous equipment. Conversely, the City can expect cost savings for Zone 7 water purchases and groundwater pumping since less water will be purchased and circulated through the system. Based on direction provided by City staff, the drought rates were developed as a proportional commodity charge increase to the proposed water usage charges for FY 2024, which allows for the ability of customers to change their water bill, encourages conservation, and promotes affordability. To prevent increasing water bills for those users already conserving, each customer will be allowed a bi-monthly allotment of 10 ccf that will be exempt from the drought rates. 1.10.2. PROPOSED DROUGHT RATES Table 1-9 through Table 1-11 show the proposed drought rates by customer class and tier for Stages 1 through 6. The drought rates for each stage are calculated based on the proportion of drought costs that need to be recovered in each stage multiplied by the base water usage rates. Based on Proposition 218 requirements, the resulting drought rates are the maximum that the City Council can implement. When officially declaring a drought stage, WATER AND RECYCLED WATER RATE STUDY REPORT It